People are the most valuable resource and should be protected. Injuries and illnesses in the workplace should be prevented whenever possible; however, not all can be.
Workers’ compensation insurance is complex and expensive. It involves people, injuries, illnesses, addiction, regulation, litigation and, sometimes, fraud. Most businesses must have this coverage, but far too often the insured does not appreciate how all its moving parts work and, if not properly understood and managed, can cost more than it should.
Premium is calculated as follows:
- Remuneration (compensation), which is not the same as payroll. Remuneration includes items from payroll, such as wages, salaries, commissions and bonuses, but it also excludes things from payroll, such as tips, premium overtime, severance, uniform allowance.
- Governing classification code and job classification codes are expressed as a percentage of every $100 of remuneration and multiplied against each employee category. The higher the risk, the higher the rate.
- Premium is increased or decreased by your experience modifier (“mod”) rating depending on your claims experience. Such an adjustment is made to reward or penalize an insured based on the amount of, and types of, claims filed.
Claims involving Indemnity (wage replacement) carry a heavier penalty than medical-only claims, so it is important that once an employee becomes ill or is injured to get them the best and right care they need so they get quickly back to work. The frequency of claims also matters. Several smaller claims may more adversely impact your mod even though their total cost equals one or a few large claims.
When a claim is filed, the insurance adjuster calculates an estimate (reserve) of what the claim may ultimately cost; both in direct medical bills and indemnity. There is a level of subjectivity involved in this computation. The following are situations that may cause you to be overcharged:
- Incorrect or inappropriate classification code is used;
- Mod is inaccurately calculated;
- Final actual cost of claim is less than reserve, but not credited to mod;
- Remuneration includes items it should not;
- Subrogated recoveries are not credited to your loss history; and/or
- Claims reserves are too high.
The insurance carrier’s annual premium audit may not detect or prevent these errors from occurring. It is the insured’s responsibility to make sure these risks are properly governed. Mistakes can be costly; however, if uncovered, you may be able to recover money from your carrier.
About the author:
David Kay, President of Expert Cost Recovery, is a CPA, certified fraud examiner and NYS licensed property and casualty insurance producer dedicated to recovering workers’ compensation premium for small- and mid-sized businesses. You can call David at (888) 444-1404 x101 or email at DavidKay@ExpertCostRecovery.com.