Workers’ Compensation Insurance (Coverage A), first approved in California in 1914, is true no fault insurance. Under this system workers who are injured or made ill by their jobs are entitled to 100% coverage for all medical costs as well as 66 2/3% of their average weekly wages, up to a maximum set by the state, for as long as they are temporarily disabled. If the injury is permanent, a permanent disability award is granted under guidelines set by the state. Should the injury result in death of the employee a death benefit is paid based on the number of the deceased’s dependents. The only trigger for coverage is that the injury must arise out of the injured person’s employment and occur in the course of it. In exchange for this unquestioned and full coverage for injury, the employee loses the right to sue his employer for recovery of damages resulting from the injury.
Employer’s Liability Insurance (Coverage B) was later added to the workers’ compensation policy and is intended to provide coverage to the employer in the unexpected event of a suit by an employee.
Osborne Insurance Agency oversees all aspects of a workers’ compensation file:
This ongoing process, which occurs throughout the policy year, is directed to making sure that our clients’ workers compensation insurance is maintained at the lowest possible cost.
Independent contractors or subcontractors are not covered by the insured employer’s workers’ compensation policy, nor is a premium charged for them. However, California laws and regulations are very liberally interpreted in favor of injured workers. If an independent contractor can be shown to have any or some of the elements of an employment relationship, the auditor is obligated to add payments to such individuals to the employer’s audited payroll and charge a premium for them. A few of the elements used to prove an employment relationship are: specific hours of employment, provision of tools, direction of how the work must be done. Some of these elements are codified and some are subjective. The best way to avoid being charged a premium for independent contractors is to insist on a certificate of workers’ compensation insurance, showing the details of the independent contractor’s coverage, before work may even begin. Many employers even require a certificate of insurance from individuals with no employees to establish proof of their independent status. In such situations the contractor can obtain coverage from the State Compensation Insurance Fund. We strongly recommend this procedure.
Every employer in California who pays an annual premium of about $7,500 (varies by company but is based on Loss Cost Rates times payroll totaling $19,900 over 3 years) is subject to Experience Rating by the Workers’ Compensation Insurance Rating Bureau. This is a multiplier of base premiums developed by each insurer. It is developed from an actuarial formula whose basis is the payroll paid by the employer and his actual claim amounts over a three-year period beginning up to 4 years and 9 months prior to the rating date. For example, the experience modification for a policy renewing on July 1, 2000 would typically be based on payroll and claims for the period July 1, 1996 to July 1, 1999. The purpose of experience rating is to apportion total premium costs among all employers by rewarding those with good experience and penalizing those with bad. The theory behind the formula is intended to place the heaviest emphasis on frequency of claims, as opposed to the more serious, but infrequent, ones. Thus, a firm with 20 claims totaling $115,000 could develop an experience modification of 1.36, while a firm with the same size payroll and classifications with 4 claims totaling the same amount could have an experience modification of .89. In no other area of this type of insurance is the benefit of a good loss control program more evident than its effect on an employers experience modification.
At expiration of each workers’ compensation policy the insurer performs a final audit to determine the actual payroll that will be used to calculate the final premium. Smaller policies are audited on a voluntary basis by mail. Larger accounts require a visit, always by appointment, by an auditor who reviews the insured’s books and records to determine actual payroll. Records required are usually California EDD quarterly payroll reports (DE-6), Federal Form 1099s and the general journal. The auditor is looking for actual payrolls, less overtime bonus pay, benefits in lieu of cash, like lodging and food and vacation and bonus payments. He or she is also looking for payments to independent contractors who might be construed as employees if not properly documented. Such payments are required by State law to be included in payroll reports if no clear independent contractual relationship can be shown to exist. After the auditor has made his or her report the insurer prepares a final audit invoice which compares premium developed by the actual audited payroll with interim payments made during the policy term. This invoice could reflect an additional amount of premium due or a return based on that comparison. This is another area that is overseen by Osborne Insurance Agency trained service personnel. Each final audit is checked to assure that correct classifications and rates have been used. While we have no way of knowing the actual audited payroll, large additional or return audit premiums will trigger a review of the actual audited figures with the insured. And, of course, we are always ready to answer any questions triggered by a final audit. As noted above, a good loss control program can have a dramatic effect on workers’ compensation insurance costs. In addition, a formal loss control program was mandated by the California State legislature when it enacted Senate Bill 198 effective January 1, 1990. This law simply codified what was always recognized as good management safety practice. It required a Management Statement of Safety Policy and assignment of responsibility for implementing a plan. It requires a system for identifying and evaluating workplace hazards and one for investigating the causes for injuries and following up with measures for preventing similar ones in the future. In addition, SB198 requires occupational training, a communication system, such as a safety committee, and record keeping systems for documenting the implementation and operation of the safety plan. Finally, the plan must have a system in place to ensure employee compliance with safe and healthful work practices. Should CAL/OSHA make an inspection, either due to an employee complaint, a serious injury or an experience modification that exceeds 1.25%, the first thing they ask for is a copy of the firm’s written safety plan. Osborne Insurance Agency, with its many years of experience and resources, is eager and capable to work with their clients and with insurance company loss control personnel in creating and implementing a loss control plan that fits each individual firm. In addition, we have access to consultants who can actually write a plan and ensure that the firm is CAL/OSHA compliant.
Workers’ Compensation rates are set competitively by each insurer. However, a rating and actuarial organization, Workers’ Compensation Insurance Rating Bureau (WCIRB), acts as a data gathering and rating organization, developing data for each of about 700 types of businesses, and publishes Loss Cost rates on behalf of the California Department of Insurance. These Loss Costs take into consideration past claims experience, current trends and future projections. They are then presented to the Insurance Commissioner, who holds a hearing, usually in October, and then either approves their use or requires some adjustment upward or downward, based upon his own estimates, effective each January 1. The newly approved Loss Costs are then used as the basis for each insurance company to set its own rates, taking into consideration expenses for claims administration, loss control and administrative expenses, as well as profit.
Another way in which Osborne Insurance Agency’s experience and expertise can be of assistance to their clients in controlling insurance costs is in the area of claims. As noted above, an employer’s experience modification is directly affected by his own claims experience. In addition, a few insurers pay dividends based on their insureds’ claim history. A good loss control program can help prevent injuries and industrial illnesses. Nonetheless, accidents happen and then control of the size of the claim depends on disciplined follow up procedures on the part of the employer or, as is more often the case, his insurance broker. An insurer must set up a reserve for every claim and often claims are neglected or over estimated, with the result being the reporting of an inflated claim. Our review process often brings to light neglected or over reserved claims. Sometimes a claim could be closed except for misunderstanding by the injured employee. Counseling of the employee by his employer on the advice of his broker often solves this.