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Shopping for workers compensation insurance

It's the law and there's no way around it: You must provide workers compensation for your employees. Workers compensation pays for medical expenses from on-the-job accidents and work-related illnesses. Check with your state's labor department for its definition of an "employee." It can include a full-time, 40-hour-per-week person, as well as someone who works three hours a week every week.

Seven ways to keep your workplace safe
  1. Ensure each employee receives a workplace-safety manual, including mission statement, rules, and safe work procedures.
  2. Conduct regular inspections of the facility to identify and correct hazards such as poor lighting, unsafe storage, and ergonomic standards.
  3. Have adjustable workstations in order to reduce stress injuries. Educate employees about safe lifting.
  4. Create return-to-work programs. Have a plan to help employees get back to work with reduced workloads and lighter-duty responsibilities. Make sure management stays in close contact with employees who are out with injuries.
  5. Communicate the importance of safety in the workplace to employees. Award and recognize safe operations.
  6. Have written road-safety procedures for anyone who drives a vehicle for the business.
  7. Keep detailed records of all accidents and have quantifiable goals for improvements.

Source: Western Insurance Information Service

Your workers compensation policy may pay medical benefits, disability income benefits, rehabilitation benefits, and death benefits. It may also use a managed care program in which employees who are hurt on the job or become ill must see a doctor in your insurance company's network.

Some workers comp policies also provide employer liability insurance, which covers you if you're sued by the family of an employee who is killed in the workplace.

Although workers comp insurance can be costly for small businesses, laws enacted in the late 1980s allow the use of "preferred providers" to curb medical care costs, a faster back-to-work process, increased emphasis on fraud detection, and better price competition among workers comp insurers. Thus, it pays to shop around.

What you must cover

Your state has its own workers comp requirements that you must comply with, including a menu of illnesses and injuries that qualify as a workers comp claim. It also mandates the level of benefits you must provide to your employees. These rules will typically address the amount of medical coverage you (or your insurance company) must provide for each employee and the percentage of the employees' salary that you must pay.

Your workers comp insurance should provide for out-of-state claims as well if you have employees who work out of state. An employee may file a claim in another state — and probably will if the other state mandates higher benefits. Thus, your policy should contain an "other states" provision that makes allowances for potentially higher payments.

Workers comp policies will typically provide basic coverage for accident and illness, as well as coverage for legal fees for lawsuits filed by employees for job-related injuries. Some states also mandate a death benefit and financial support to dependents.

How your premium is calculated

The National Council on Compensation Insurance (NCCI) sets the standards for workers compensation insurance premiums and uses more than 700 numbered codes, each corresponding to a specific job description, to help figure those premiums. The process of compiling information from your agent, the insurance company, the NCCI, and your records is arduous. State-by-state regulations further complicate the formula, so it's not that unusual to overpay for workers compensation insurance, considering the many factors that go into the formula.

Your first year's premium will be estimated by your insurer, using your estimation of the company's payroll and the nature of your business. It's often difficult for a new business to predict what its first-year payroll will be, so it's important to make any necessary adjustments through your agent. The insurance company will do an audit at the end of the first year to determine a more accurate premium based on a year of payroll information and your business classification. You can ask for a copy of the insurance auditor's calculations or work papers to see how payroll was calculated and look at any classification changes. After the first year, your premium is based on your workplace injury rate, among other factors, so you may see a change based on your company's experience with workers comp claims.

For information on insurers that sell workers comp in your state, see Insure.com's Standard & Poor's Insurance Company Guide.

Fortunately, there are a few private companies that work to ensure accurate premium calculations. Independent premium auditors specialize in finding overcharges in workers compensation premiums. An overcharge can occur when payroll is reported to the insurance company incorrectly, showing too many workers in risky jobs, or when a business is misclassified as a more-risky workplace.

Even though states mandate workers comp, they don't set the premiums but merely approve the rates that prescribe a certain dollar amount in workers comp premium for every $100 of payroll. Some states allow discretionary credits, which allow insurance companies to discount premiums — a big help to insurers in a competitive workers comp marketplace. Those discounts can work to employers' advantage, obviously, and are largely based on good safety records or a good claims history for your company.

Miscellaneous tips on workers comp coverage
  • Discuss thoroughly with your agent every aspect of your business. If you're an auto body shop, but sell fireworks as well, mention it up front. Your premium will be more realistic the more honest you are to begin with. If your payroll or business description changes during the year, you can always change your workers comp policy to reflect those changes.
  • Some states exclude officers, owners, partnerships, and sole proprietors from required workers comp coverage, so if you want to cover any of these people with your workers comp policy you may have to request that coverage specifically.

Regardless of the size of your business, accurate payroll records are essential in determining premiums. But payroll isn't the only component of remuneration. The NCCI also considers employee commissions, bonuses, overtime, holiday, vacation, sick pay, incentive plans, profit-sharing plans, payments for tool reimbursements, the value of rental housing and lodging provided by an employer, the value of meals provided by employer, and the value of store certificates or merchandise given to employees.

In setting rates, the NCCI doesn't consider tips and gratuities, group insurance payments, or the value of any of the following items: awards paid for invention or discovery, employer-provided automobile or aircraft, free or discounted air travel, incentive vacations, or any discount of property or services and tickets to an entertainment event that the employer sponsors.

You can see already how the process for just reporting remuneration is lengthy.

Minimizing your premiums

Keep an eye on your payroll records and make sure your employees are correctly classified. For example, if a laborer was promoted to foreman, chances are he now has supervisory duties, which should lower your rate because that employee is no longer in a position where he could easily be injured. Changes in job descriptions might impact workers comp premiums and should be reported to your agent.

Some insurance companies provide premium discounts as a reward for safer working conditions. Check with your insurance company to find out if you qualify.

You may be eligible for a better rating if your company's claims history is lower than the industry average. This experience-rated coverage may require that you pay a minimum premium first, but might be worth checking into.

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