Article 2 of the 6 part series: The 6 Things Every
Employer Must Know About Workers' Compensation Insurance
The Million Dollar Question
How do you know if your business or organization is being
charged the correct amount for workers compensation
insurance? I'm not talking about whether or not you think
your premium is too high. I'm asking what procedure do you
have in place to confirm that what your business actually
does is properly reflected in your rate classification?
I'm waiting...OK that's what I thought.
Does This Describe Your Company?
When you first went into the widget making business you
realized that if you were going to have employees, you were
going to have to purchase workers compensation insurance.
(If you didn't realize it now would be a good time to read
my previous article). So you called your insurance agent
and said you were about to hire your first employee. Your
agent had always done a great job on your car insurance so
you figured she's probably an expert at workers comp
insurance as well. The agent came out and looked around
your new business. She then consulted her trusty workers
comp rating manual from XYZ insurance company and picked
one of the available 330 classifications approved by the
Pennsylvania Compensation Rating Bureau (PCRB) and assigned
it to your business. The insurance company then charged
you a premium based on your classification and your
payroll. End of story right?
Now It's 10 Years Later
Congratulations! Not only have you remained in business
for 10 years you've really prospered. Now instead of just
one employee, you have 50. And boy has your business
changed. No longer do you just make widgets, you
distribute, install, and service them. In fact, you don't
really manufacture them at all. Five years ago you decided
it was cheaper to outsource the manufacturing part of the
business. Throughout this time your agent checked in with
you and steadily increased your payroll as your number of
employees increased. But she hasn't walked through your
facility in 10 years and doesn't understand that your
business has fundamentally changed. Therefore, you're
still paying your workers comp premiums based on a
manufacturing rate. Think a manufacturing rate might be
higher than a service rate?
Isn't Misclassification Pretty Uncommon?
NO! In fact there are companies out there that do nothing
but audit organizations' workers comp premiums looking for
mistakes. The industry consensus is that anywhere from
60%-75% of all companies have some sort of miscalculation
figured into their premium.
What Could that Mean to My Organization?
Let's assume that the rate for widget manufacturing is $8
for every $100 of payroll. We'll further assume that 40 of
your 50 employees are currently classified as such and as a
group represent $1,200,000 of payroll. Your unadjusted
workers comp premium for this group would be $96,000 per
year. But what if your employees were properly classified
at the lesser widget service rate? For this example we'll
assume the rate to service widgets is $5 for every $100 of
payroll. Well, you just saved yourself $36,000 a year.
Multiply that by the number of years you've been
misclassified and you may break down in tears!
How Can I Prevent This From Happening?
The answer here is twofold: (1) Partner with an insurance
provider who doesn't forget about you as soon as they write
your insurance policies. (2) Make sure that your provider
understands the nuances of workers compensation insurance
and is proactive in monitoring your account. In our
example above, the agent did check-in periodically to
update your company's payroll. But she didn't realize that
the business had changed and that a re-classification was
in order. A costly and unnecessary mistake!
So What Can You Do Now?
Next week I will be publishing a follow up article showing
how you can find out if this has happened to your company
and also how you can recoup some of your money. Until
then, feel free to contact me using the information below.
----------------------------------------------------
Eric D. Patrick, is an attorney and Chief Operating Officer
of Consumers Insurance Agency Inc.
http://www.consumers-insurance.com . He is involved in two
law practices and engages in insurance and legal consulting
through his RiskAssure Consulting Group
http://www.ThatsNotCovered.com . Please contact him for
further information.
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