Workers' compensation insurance is one of those "must have" insurance products for almost every business organization. The premium is always subject to claims history and is determined at every renewal after an annual audit of the company’s actual payroll for the policy period. Workers’ compensation premiums are based on payrolls within each class. There are several other factors that can lead to an organization being overcharged:
- Incorrect class codes or misclassified employees
- Removal of scheduled credits and premium discounts
- Unexplained experience modification errors
- Errors in charges for subcontractors who may have a valid certificate of insurance
- Payroll errors
How Class Errors Can Cost You Money on Your Workers' Compensation Insurance
Typically, a business owner or manager is not aware their organization is being overcharged until they change companies or agents, go through an audit, or compare policies with a similar organization. Although many policyholders are overcharged at some point in their business life cycle, most of them are unaware that there are errors in their premium calculations. Misclassifying employees and subcontractors can lead to significant overcharges that will accumulate year after year. The misclassification of a worker is typically the result of a communication problem between the business and the agent which is why it is so important to take time with your agent to make sure he or she understands every employee's job description and list of duties.
Workers' compensation insurance rates are typically calculated by the insurer charging a rate based on a class code assigned to each respective job function in a specific industry. There is an overall class code or governing class code that is used to identify the industry and an associated rate charge. For contractors such as plumbers, window washers, and roofers, the classification can be broken down further based on job descriptions rather than overall class code. The premium is determined by multiplying the rate for the class code times $100 of payroll.
Let's use, for example, a painting business that has a company officer and five employees. According to the workers' compensation (WC) rates for Georgia, the base premium calculations would be as follows:
Governing class code: 5474 Rate (preferred) $9.00 per $100 Total Payroll: $285,000
Calculation: $285,000 divided by $100 = $285 times $9.00 = $25,650 premium before fees
If we use the same rate for employees and the company officer, we arrive at $25,650 (preferred rate).
Since this painting business is a contractor and we are allowed to use the standard exception codes, we can rate this business as follows:
Company officer Payroll = $85,000 Exclude from coverage.
Two painters = $135,000 divided by $100, times $9.00 rate = $12,150
One office person = $25,000 divided by $100, times the clerical rate of $.12 = $30.00
One sales person = $40,000 divided by $100, times the outside sales rate of $.24 = $96.00
By using the corrected class codes for this business, the workers' compensation rates are reduced to $12,276 which more accurately reflects the risk of two painters rather than five.
The base rates for the policy (before admin fees) would be $12,275 which is a savings of $13,375 per year depending on the state and associated rates for this class of business.
Review Your Application and Speak with Your Auditor
As a business owner or manager, once you understand that workers' compensation policies often contains rating errors, it makes financial sense to spend time reviewing your business' application for insurance to make certain it has been completed accurately. It is also a great idea to speak with your auditor and ask questions regarding class codes and the associated rates.