Protecting your company’s most valuable asset, your employees, is a business owner’s legal obligation. One of the most basic costs of doing business is insuring your employees against injury on the job. That’s where workers’ compensation insurance comes in. If you have employees… you need workers’ comp insurance. Workers’ comp insurance is a no-fault insurance program that is paid by employers to protect employees should they get hurt while doing their job. In this blog article, we’ll provide answers to five of the most basic questions normally asked about workers’ comp. And show you how to reduce the risk of an unbalanced workers' comp insurance audit with a pay-as-you-go program.
1. Who Needs to Have Workers’ Compensation Insurance?
Workers’ compensation insurance is regulated at the state level. By law, all states except Texas, South Carolina and New Jersey require most businesses to provide workers’ comp insurance to their employees.
2. What Does Workers’ Compensation Insurance Cover?
All work related injuries or deaths. Workers’ comp insurance will also cover an employee’s medical treatment, hospitalization, rehabilitation and lost wages.
3. How Do Business Owners Typically Secure Workers’ Comp Insurance Coverage?
Workers’ compensation insurance is sold through a property & casualty (P&C) agent. Not all insurance companies offer workers’ comp as a line of insurance. For example, State Farm and Allstate only offer workers’ comp insurance in select states while Liberty Mutual, Zurich, Hartford, and Travelers provide workers’ comp coverage in all 50 states.
Some businesses secure their workers’ compensation coverage from the state fund. Each state has a state fund established to provide workers’ compensation insurance for those hard to place risks.
4. How Does a Traditional Workers’ Compensation Policy Work?
Every business with employees must have each employee classified correctly by National Council on Compensation Insurance (NCCI) rules. The class code provides the insurance carrier with the needed information to assess the risk. A class code of 8810 – or clerical – carries a low hazard risk while a class code of 7611 for Telephone and Cable TV Line Installation carries a greater risk or hazard.
A telephone line repair company most likely has both clerical positions as well as installer and repairmen positions. It is important to know which workers are in each position as it influences the premium.
All workers’ comp codes are charged a dollar amount per $100.00 of payroll. While a clerical code of 8810 may generate a $.50 rate per $100 of payroll, a contractor code of 7611 may generate a $3.00 rate per $100 of payroll.
The licensed insurance agent completes an Acord application on the business. This application gathers all the pertinent information necessary to provide an insurance quote. The agent submits the Acord application to the insurance carrier who “underwrites” the application to determine whether they will provide a quote or a “do not quote” response.
Some quotes are guaranteed while others are presented with a “subject to” clause. The most common “subject to” quote issuance is for loss runs or a no loss letter. If a business receives a quote and choses to bind coverage, they will be responsible for providing a deposit of 10 – 20% of the total annual premium in the form of a deposit. If the annual premium is $10,000, the business’s deposit will range from $1,000 to $2,000. The remaining balance of the premium can be paid monthly, quarterly or annually.
At the end of the year, the insurance carrier performs an “audit”. They look at the actual dollars paid in payroll versus what was billed for the workers’ comp premium. The difference is owed to the carrier or refunded if the carrier overcollected on the premium.
5. How Does a Pay-As-You-Go Policy Work?
The classification of employees and the application process are the same for a pay-as-you-go program. The main difference is that typically there is no deposit required for this type of workers’ comp policy.
The premium for a pay-as-you-go policy is divided by the number of payrolls over a 12 month period. If there are 26 pay periods (or if the business processes their payroll on a bi-weekly basis), then the annual premium is divided by 26 to determine the amount collected each pay period. Likewise, if a business runs their payroll weekly, then the premium is divided by 52 to determine the amount collected each pay period.
A year-end audit is still performed with a pay-as-you-go workers’ comp policy. But since the rates and premium amounts are calculated from live or actual payroll data each pay period (as opposed to an estimate), the risk of an unbalanced audit is mitigated or reduced.
Think You are Paying Too Much for Your Workers' Comp Policy?
Or want to improve your cash flow and switch to a pay-as-you-go program? Get a free workers' comp insurance quote and see if you can save money.