. Workers’ Compensation Basics

. Disclaimer Insurance forms and endorsements vary based on insurance company; changes in edition dates; regulations; court decisions; and state jurisdiction. The instructional materials provided by The Insurance Community Center and its authors is intended as a general guideline and any interpretations provided by The Community do not modify or revise insurance policy language. Information which is copyrighted and proprietary to Insurance Services Office, Inc. (“ISO Material”) is included in this publication. Use of the ISO Material is limited to ISO Participating Insurers and their Authorized Representatives. Use by ISO Participating Insurers is limited to use in those jurisdictions for which the insurer has an appropriate participation with ISO. Use of the ISO Material by Authorized Representatives is limited to use solely on behalf of one or more ISO Participating Insurers. The authors of these materials and The Insurance Community Center assumes neither liability nor responsibility to any person or business with respect to any loss that is alleged to be caused directly or indirectly as a result of the instructional materials provided. Copyright 2010 All Rights Reserved 2

. What this class will cover 1.The evolution of Workers’ Compensation laws in the U. S. 2.Workers’ Compensation coverage concepts 3.Basics of providing Workers’ Compensation coverage 3

. Before There Was WC in the US 4 Relied upon other resources, such as charity Employees often had no resources to sue Employees had to sue employer for negligence or some other form of tort for injury or illness

. Foundation of WC Laws in the US 5 Wisconsin first state in 1911 All by 1948 No fault coverage / statutory benefits Employers protected from lawsuits Exclusive remedy

. 6 Objectives of WC Laws Provide reasonable benefitsReduce lawsuitsEncourage safety

. WC Legal Concepts Strict liability No need to prove negligence by employer Employee retains some legal rights to sue employer Employer assault Fraudulent concealment of injury Injury / illness caused by employer product Employer removal of safeguards 7

. Employers Liability Some states WC not mandatory for one or two employees On the job injury NOT occupational disease or AOE/COE Some states permit suits and recovery by spouses for damages (loss of consortium, comfort and affection) Third party "Action Over" suits (non- contractual) Exception to “exclusive remedy” to the degree not excluded from policy 8

. Individual State Differences Monopolistic states Coverage provided through state program only ND, OH, WA, WY Texas allows employers to “opt-out” of WC system Benefits vary by state 9

. Individual State Differences Residual pool coverage Assigned risk type of coverage when employers don’t qualify for competitive market due to losses Competitive market All other states allow competition among insurers 10

Employer and Employee Definitions

. Employer Defined by State Statutes Generally – any employer of a natural person in service to the employer Some states have minimum number of employees before required to carry WC Many states have exceptions for certain occupations Farm labor Domestics 12

. Employer Most states have exceptions for certain positions Sole proprietors with no other employees Partners of a partnership Executive officers that are also owners Members of a Limited Liability Company 13

. Employee Natural person engaged in the service of an employer to benefit the employer or a third party Questions remain regarding independent contractor status 14

. Employee or Independent Contractor Does “employer” have right to control the work Does “employer” control quality of work Does “employee” work only for the “employer” IRS has criterion that may be helpful 15

. IRS Guidelines Does employer set the times and places of work Does employer provide the tools, equipment, vehicles, materials for the job Does employer provide training Does employer reimburse for expenses Does employer file W-2 or

. IRS Guidelines Does employee personally perform the services Does employee continuous perform work for the same employer Does employee maintain separate business with required license, permit and insurance Does employee file as a business 17

. Qualifying Injury / Illness 18 Accidents Occupational Disease Arising out of employment (AOE) In the course of employment (COE)

. Penalties All states have penalties by statute that apply to employers not providing WC coverage when required Fines vary by state Jail 19

The Workers’ Compensation Policy

. Policy Forms Coverage follows state law Standardized form created and used by many states National Council on Compensation Insurance 21

Required Information

. Required Information To Complete Application for Coverage Employer Name and type of Entity Known States of Employment Possible States of Employment 23

. Required Information To Complete Application for Coverage Number of EmployeesJob Descriptions Annual Payroll by Descriptions 24

. Purpose of Payroll and Job Descriptions Premium charge developed based upon payroll and classifications Descriptions of jobs identifies classification to be assigned 25

. Purpose of Payroll and Job Descriptions Basic rules apply – established by – NCCI or other rating bureau – Non-NCCI States California New York New Jersey Delaware Pennsylvania – These states use classification systems similar to NCCI 26

. NCCI Publishes classification codes in their Scopes Manual / eSCAD on line WCIRB – An alphabetical index – Numerical index – 27

. Establishing Classifications Each specific job classification is assigned a four-digit number (code) Each code has its own rate used to establish premium Governing class – The code that most accurately describes the business operations – Carries highest amount of payroll (other than standard exceptions) 28

. Establishing Classifications Standard exceptions – NOT included in governing class unless specifically included Examples – Clerical – Outside sales 29

. Standard Classification System Contains over 700 industry classifications and describes groups of employers whose businesses are relatively similar NPD – No Payroll Division – All payroll goes in governing class no separation of payroll for clerical or outside sales NOC – Not otherwise classified 30

. Classification by Industry Group Groups businesses with similar hazards Costs distributed fairly among similar business Grouping allows cost control through industry wide safety and loss prevention New industries can add classifications – Large enough group – Identifiable job risks 31

. Classification by Industry Group Assignment by analogy – Type of business not explicitly classified – Uses similar business classifications and hazards 32

. Step to Determine Proper Class 1.Review classification pages of the Basic Manual 2.See alphabetical index in Scopes Manual 3.See industry index of Scopes Manual 4.Review phraseology under each possible industry group 33

. More Than One Governing Class Type of industry requires separate rating by classifications Employer separates payroll Example - construction – Drywall – Framing – Roofing – Electrical 34

. Premium Development Proper classification Proper payroll – Company owners may have minimum and maximum payrolls Insurance company loss factors – Used to increase basic rates for loss adjustment costs and expenses Experience modification factor 35

. Experience Modification Factor This is a factor used by insurance companies for insureds that qualify based upon the amount of annual premium paid Rating bureaus (NCCI and others) compare the insured’s loss data to the average of all employers in that state that have the same classification codes Can increase or decrease the premium developed by the classification code rate time the payroll 36

. Experience Modification Factor Frequency and/or severity or both affect the Ex Mod Typically a period of time is used for payroll and loss data collection, often four years and excluding the most recent policy year System designed to provide a safer work environment for employees 37

. Experience Modification Factor Rewards employers with good loss records Penalizes employers with worse than average loss records Eligibility –NCCI (varies by state) – The minimum premium requirements range from $2,500 to $5,750 annually or from $4,500 to $11,500 for the last 2 years of the experience period 38

. Eligibility Eligibility ’09 for Experience Period- CA – $16,300 in premium based on Current (2010) – Pure Premium Rate during experience period – Remuneration during experience period times current pure premium 39

. Software Systems to Help Analyze Mod ModMaster: 40

. Information Used to Calculate Mod Unit Statistical Filings Audited payroll by classification Claim information – Valuation dates are 18, 30, 42, 54, 66 months after the inception of policy – Filing date – 2 months after valuation 41

. Business Ownership Affect on Ex Mod Most states have regulations pertaining to the sale or acquisition of a business and how that affects the business Ex Mod If the business is maintained as a separate entity with new owners, it will keep the same Ex Mod unless: – There is a material change in ownership AND either a material change in operations or a material change in employees 42

WC Coverage Review

. WC Coverage Basics Named insured should be the actual employer name Mailing address Locations of work Payroll information Classification of jobs 44

. What is Shown on The Dec Page 1Part 1 is the statutory coverage and pays state required benefits 2Policy Period 3 A This is where all states are listed where operations or work locations are known 3 B Part 2 is Employer’s Liability – defends the insured if the employee is allowed to sue Limits of insurance $500,000 up to $2,000,000 45

. The Declarations Page 3 C This section should include language that states: “all other states, other than monopolistic states or those shown in 3A. This allows the benefits in those possible work states to be paid, rather than the state benefits of those shown in 3A which may be lower 4 Classification schedule to develop premium 46

. Coverage Review – Part 1 General Section – Covers all of employers workplaces listed on the Dec (Information) Page as well as all locations shown in 3. A. Insurance applies – AOE / COE – Pay all claims required 47

. Coverage Review – Part 1 Benefits paid – Medical – Disability – Death – Rehabilitation costs 48

. Coverage Review – Part 1 Payments not paid by insurance – any additional money required because of: – Serious and willful misconduct – Knowingly violated the law in employment – Failure to comply with health or safety law or regulation – Discharge, coerce or discriminate against an employee Statutory provisions apply 49

. Coverage Review – Part 2 Pays defense and damages for lawsuits filed by employees or dependents against the named insured employer Insurance applies – Bodily injury by accident or by disease – AOE / COE and occur during policy period – Necessary or incidental to work – Suit must be brought within the US, territories or possessions or Canada 50

. Coverage Review – Part 2 If the insured is performing work in a monopolistic state, the statutory coverage is purchased through the state Employer’s Liability is not included – Must purchase Stop Gap Liability – Some states require this to be added to the Commercial General Liability policy – Others may allow this to be added to another WC policy carried by the insured Show this coverage as an underlying coverage on the Umbrella policy 51

. Coverage Review – Part 2 Insuring Agreement – Pays all sums legally liable – Care and loss of services – Consequential BI to spouse, child, parent, brother or sister of injured employee – BI to an employee arising of a capacity other than as an employer (such as a manufacturer of a product that causes the injury) 52

. Coverage Review – Part 2 Exclusions – Contractually assumed liability – Punitive damages – Knowledgeable violation of law – Obligations required under any WC law – covered under Part 1 – BI outside US, territories, possessions or Canada, except for outside temporarily – Damages arising out of coercion, criticism, discrimination, harassment – Covered under federal laws 53

. Coverage Review – Part 3 Other states – 3. C. applies only if one or more states are shown and work begins in disclosed states after policy effective date – Any work that begins before effective date of policy and not reported within 30 days – no coverage – Reimburse for benefits if not permitted to pay directly 54

. Employee Outside Listed State or US Most state laws allow benefits for residents working temporarily outside their own state or country Many states may allow benefits for non- residents if the requirements of that State are met – 23 states cover all in-state injures – 4 states have special limits (AZ) – 6 states exclude if covered in another state (CA) 55

. Employee Outside Listed State or US Miscellaneous – Other states leave it up the courts to decide except OH bars claims by those temporarily in state NY fact specific 56

. Coverage Review – Part 4 Duties after a loss – Report – Give specifics of injury or illness – Send demands and notices – Cooperate – Do nothing to impair subrogation rights – No voluntary payments 57

. Worker's Compensation Endorsements / Coverages Voluntary Compensation and Employers Liability Coverage – WC A – Provides benefits to persons not subject to the Act – Describe the type of employment in the Endorsement Schedule – Examples of use: Sole proprietors, partners or officers don’t fall under the Act Types of employment not covered under the Act 58

. WC - Federal Endorsements Longshore and Harbor Workers’ Compensation Act - WC – Provides WC benefits to employees, (other than masters and members of crew of a vessel) – Injured in maritime employment Loading and unloading a vessel Repairing or rebuilding a vessel Subject to size (ft of vessel and tonnage) – 1984 – Specific exceptions Restaurants, clerical, employed by marina and more…. If subject to state workers’ compensation coverage 59

. Waiver of Subrogation Specific endorsement added to a Workers’ Compensation to waive the carriers right to go against the organization named who may be responsible for the accident A charge is typically made if the insurance company will allow subrogation rights to be waived 60

. References and Resources NCCI – National Council on Compensation – See Silverplume / Sage to Access WCIRB U.S. Chamber of Commerce (202) – 2009 Analysis of Workers Compensation Laws The Workers Compensation Guide – See Silverplume / Sage International Risk Management Institute Your bureau manual – WCIRB, NCCI or others 61