Welcome to the Insurance Community University s audio series of classes. These audio classes are intended to provide you with an overview of specific insurance topics. The university provides other resources rela ng to these same insurance topics to provide more in depth informa on, including PowerPoint presenta ons and ar cles specific to the topics. Each month the university will be conduc ng live webinars on various topics offered free of charge to members of the university. This then provides you with opportuni es to ask ques ons of the presenters in real me. The subject of this presenta on is an Overview of Workers Compensa on Coverage. My name is Casey Roberts, principal and founder of Laurus Insurance Consul ng. Our overview of Workers Compensa on will cover the following topics: - Reasons for establishment of workers compensa on insurance - Objec ves of workers compensa on laws - Who is covered - How is coverage provided - What benefits are provided - Coverage considera ons - Generally useful endorsements As this is a general overview of the topic it is important for us to remember that workers compensa on coverage is available and/or required on a state by state basis. You may have an employer who has employees in one state that does not require the employer to provide workers comp but when his employees are in a neighboring state workers compensa on is required. In California, as an example, if you are an employer and you have one employee part me or full me you are required by statute to maintain in effect a workers compensa on policy. Other states have allowances that provide excep ons to the applica on of the requirement to carry coverage based upon the number of employees one maintains or the amount of payroll one has on their books. Many states also have excep ons for domes c employees and those engaged in agricultural work. The evolu on of workers compensa on in the United States started in 1911 in Wisconsin the first state to file a comprehensive law regarding employers and the need for work comp coverage. Various states followed - nine others alone in that same year. The final state to pass workers compensa on legisla on was Mississippi in 1948. Work Comp essen ally was established as a trade off between the business and legal community as a way of containing costs while providing limited protec on to employees who were injured in the course of their employment. Page 1
Prior to the establishment of workers comp an injured employee had to sue under common law. Imagine, especially in the early 1900 s, the adversarial posi on that put the employee in. By providing workers compensa on AND requiring all employers to carry the coverage the playing field for all employers in the same jurisdic on was leveled. Employers could then figure the coverage into their cost of doing business and maintain a constant and healthy workforce. Thus the concerns of employers are addressed as they do not have to set aside money for poten al lawsuits and the resultant expense there from and employees are protected for injuries they receive that arise from their employment. The Objec ves of workers compensa on are: - To provide certain, prompt & reasonable income and medical expenses to work accident vic ms and their dependents regardless of fault. - Provide a single remedy or sole remedy in order to limit legal delays and the a endant costs of lawsuits - Eliminate payment of fees to lawyers and witnesses in trials - Relieve public & private chari es of financial drains because of uncompensated industrial accidents - Encourage employer interest in safety and rehabilita on through appropriate ra ng mechanisms these are called experience modifica on factors - Promote a frank study of the causes of accidents rather than a possible concealment of fault Workers Compensa on pays for all reasonable medical expenses that one incurs because of an injury and/or occupa onal disease that is AOE and COE. These acronyms work comp law is replete with acronyms mean arising out of employment (AOE) and in the course of employment (COE). In addi on, if one is disabled par ally or totally and/or permanently or temporarily there is subsequent payment for those disabili es. Expenses are also provided in most jurisdic ons to assist in the rehabilita on of an injured employee should they need to be re-trained to take other work. Work comp was also designed to be the single or sole remedy for an injured worker. In other words there is intended to be a limita on to the number and types of lawsuits that can emanate from a work related injury. Por ons of this sole remedy intent have been eroded over the years by various legal decisions. Legislators then o en mes pass laws intending to address these shortcomings of the system and further lawsuits follow. While it is a far from perfect system in the whole it addresses the needs of employers and injured employees fairly well. Insofar as who is covered most statutes provide coverage for every person in the service of an employer, full- me and part- me, whether or not they are lawfully employed. Some states have recently a acked the lawfully employed provision essen ally a emp ng to deny benefits to injured employees that are not in the state of jurisdic on legally. This is s ll an evolving segment of law that is subject to state by state interpreta ons and as such we will not further address it at this me. Suffice it to say that for the most part if an employee is injured while working for an employer and they can show that the injury arose out of and in the course of employment then the workers compensa on coverage would apply. Page 2
Some states even apply work comp statutes to residen al employees of homeowners, i.e. domes c employees such as gardeners, housekeepers and the like. Coverage is normally provided by the purchase of a workers compensa on insurance policy. Some states allow for self-insurance as well. In most states there is a compe on among private insurers to provide coverage. There remain four (4) states that currently are monopolis c in their approach. This means that the sole provider of insurance is the state itself. These four monopolis c states are Washington, Wyoming, North Dakota & Ohio. Besides being a monopolis c state, Washington is also the lone state that charges employees a tax per se for their par cipa on in coverage. A recent ballot ini a ve in Washington to provide for a compe ve workers compensa on program was defeated. In the other forty six (46) states there is significant compe on among insurers to select risks, charge an appropriate premium, manage the losses and earn a profit. Before we progress any further we need to consider a few addi onal facts. One item to remember is that benefits can and do vary significantly from state to state. As examples: - The wai ng period which an injured worker needs to undergo before being eligible to receive indemnity payments. The varia ons are from as li le as 32 hours (Montana) to as long as one week (mul ple states). - Temporary Total Disability Maximum weekly benefits that are allowed are as li le as $398.93 (Mississippi) to as great as $1366.00 (Iowa) - Maximum Weekly Death benefits can range from $335.01 (Kentucky) to $1366.00 (Iowa) This informa on derived from Na onal Academy of Social Insurance website (www.nasi.org) Thus considera on needs to be given to WHERE an employee is injured. Some jurisdic ons allow an injured employee to choose the state from which they will receive benefits when they are injured. The selec ons can include: - The state where they were hired - The state where they were injured - The state where the company for whom they worked is domiciled - The state where they live - The state where the contract was executed - The state where the work is regularly performed Page 3
Class codes are used by insurers and managed by various en es within each state to properly classify each individual business that is subject to the work comp law. The class codes are used to place each worker within the proper industrial grouping that applies to their occupa on so that the proper premium basis is determined for each employer. In other words a restaurant worker is a restaurant worker whether they work at Applebee s, Chili s, Olive Garden or Joe s Coffee Shop. As to restaurant workers as used in this example, each employer will start with the same class code for their restaurant employees. Premium is determined by calcula ng a rate per $100.00 of employee compensa on mes the applicable amount of payroll. From this an es mated annual premium (EAP) is determined. At the end of the policy term (normally one year) the policy is audited on either a physical basis (meaning the insurance company will send someone out to the insured s place of business to perform the audit) or a voluntary basis (meaning the insured completes some paperwork and provides back-up proof to the insurance company as to their actual payroll for the covered term). Most states determine based upon the premium size of the policy as to whether or not the audit is a physical one or a voluntary one. As an example of how premium is determined, let us say that we have a restaurant owner with ten (10) employees. Her ten (10) employees earn a total payroll of $350,000 annually. If the rate per $100.00 of payroll were $3.00 then the es mated annual premium would be determined by mul plying the $3.00 rate mes 3500. We would arrive at an EAP of $10,500. This annualized premium would either be set-up on what is called a s pulated billing basis or on a repor ng basis. The s pulated premium billing means the insured pays a specific amount of premium on a regularly scheduled basis; normally monthly, quarterly or semi-annually. The repor ng basis means that the insured reports their payroll for a par cular covered meframe, say a month at a me, and pays premium as determined by the rate per hundred dollars of payroll mes their actual payroll for the month being reported. Regardless of whether the insured is paid on a s pulated basis or a repor ng one - at the end of the policy term the premium is trued up by means of the audit. If the insured es mated their annual payroll to be $350,000 and it ended up being $400,000 they would owe an addi onal premium. Conversely if her actual payroll ended up being $300,000 she would receive a return premium. When an insured reaches a pre-determined premium size over a par cular length of me (called an experience period) they can become subject to what is called an experience modifica on factor. This is a way of providing an addi onal incen ve to employers to maintain a be er than average workplace when measured by prior losses and premiums. Basically an ex-mod (which is the common term used in the industry) measures an insured s experience against similar sized employers with the same classifica on codes. The intent of an ex-mod is to charge a higher premium (also called a debit mod) for those whose opera ons are less safe (as measured by losses and premium size) versus those who run safer opera ons using those same measurements (those safer opera ons would receive a credit mod). Mods are applied during the calcula on of the es mated annual premiums and can have a significant impact on the amount of premium one pays. Page 4
Coverage in each state is the same from insurance carrier to insurance carrier. Each carrier issues a policy that is subject to terms and condi ons and policy language that is generally the same for each insurer. So if a customer were to receive quotes from three different agents or brokers using three different companies the policies in all likelihood would look and react in the same manner. The difference in carriers can be significant, however, and can truly assist in determining which carrier is most apropos for the insured. Some insurers are be er at providing loss control services while others are superior at managing claims. These factors can have significant long term affects on an insured s future premiums. It is most important when working with carriers on various risks to determine beforehand what services that a carrier may provide are going to be needed by the customer. The lowest price is more o en than not a poor determinant for choosing the proper insurer for a risk. In addi on when designing the coverage for their customer the agent/broker needs to pursue an appropriate pa ern of risk and exposure determina on. If a customer has people working in more than one state at the me of the wri ng of the policy then the agent needs to make certain that the insurer knows this. Some insurers are licensed in a few states while others are na onal in their scope. This is an important considera on when designing the coverage. Also to be noted is that coverage for the appropriate states where one wishes coverage to apply is indicated on the declara ons page of the policy. The Declara ons Page is also called the informa on page. It is here that the insurance company indicates the policy number, who the named insured is, the length of the policy term, applicable endorsements and the like. On the declara ons page there are three (3) addi onal important items to consider: - Item 3A shows to which states the coverage applies as of the effec ve date of the policy - Item B indicates the limits of Employers Liability Coverage that applies - Item C is for other states insurance These three items take on added significance for the following reasons: Item 3A the general sec on of the policy tells us that if a state is listed in 3A of the informa on page then coverage applies for losses that emanate from that state. Item B although workers comp is designed to be the sole remedy for an injured employee, the possibility of a lawsuit from a work related injury does exist. Item B provides for this possibility and also addresses coverage for disease that comes from employment related ac vi es. Limits can be increased with minimal premium impact to $1,000,000 for bodily injury by accident, $1,000,000 bodily injury by disease per employee and $1,000,000 aggregate for bodily injury by disease. One example of a loss where Employers Liability coverage could come into play would be a third party ac on over claim. This would occur when an employee is injured on the job because of the ac ons of a third party. It is to be noted that some states bar claims of this nature while others do not. Page 5
Item C As coverage is provided in item 3A of the informa on page for loca ons where the insured has known exposures at the incep on of coverage, Item C is where an agent needs to indicate the insured wants coverage to apply in those states that are listed in item C should an exposure arise during the course of the policy year. Preferred language for Item C is all states except the monopolis c states. Thereby providing coverage should a loss occur in non-monopolis c states during the course of the policy where the insured did not have employees when the policy incepted. We now come to some of the more commonly u lized coverage endorsements. We will look at five (5); Jones Act, U.S. Longshore & Harbor Workers Act, Foreign Compensa on, Voluntary Compensa on and Stop Gap endorsements. 1. Jones Act provides coverage for masters and members of a crew engaged in mari me ac vi es. The use of coverage known as P & I (protec on and indemnity) is probably a be er manner in which to provide coverage for masters and crew members but Jones Act coverage is available as part of the workers compensa on contract. 2. U.S. Longshore & Harbor Workers Act is a federal law applicable to certain employees engaged in mari me ac vi es that are NOT members of a crew or masters of a vessel. To qualify for benefits under this coverage the employee must 1) be engaged in shipbuilding or longshore work, 2) his employer must be engaged in the mari me industry and 3) the injury must occur on or near water. 3. Foreign Voluntary Compensa on provides coverage for those beyond the coverage territory of the work comp policy, i.e. those working in foreign lands. Coverage will vary from insurer to insurer. If, as an example, the employer is providing work comp coverage that complies with the laws of the foreign land in which the employee is working, then the insurer would be responsible for the difference in benefits between the local coverage where the party was injured and the benefits as provided in the state specified in the endorsement that was issued by the U.S. company. This endorsement can provide coverage for the cost of repatria on of the injured employee (bringing them back to the U.S a er they are injured or die in the course of their employment) as well as for endemic disease, i.e. the disease that is prevalent in a country or region at almost all mes, e.g. malaria in tropical climes. Coverage o en will apply on a twenty four (24) hour basis during the employees stay in the foreign territory. What is important to remember is that Foreign Compensa on does vary from carrier to carrier. Also, one needs to be aware of how well a par cular company will be able to respond to injuries in a foreign territory. Injuries from war are excluded. Also if an injured employee were to decline the Foreign coverage (a er the injury) and sue the employer, this would be another instance where the Employers Liability coverage would apply. Page 6
1. Voluntary Compensa on extends benefits to those employments that are normally excluded by law in various jurisdic ons. Agricultural workers, as an example, in many states are not required to be covered under workers compensa on statutes. This would provide coverage for them. In addi on some carriers use this endorsement to provide coverage for volunteer labor this o en occurs with non-profit organiza ons. 2. Stop Gap coverage is an endorsement used for employers that have employees in the four (4) monopolis c states of Washington, Wyoming, North Dakota and Ohio. Monopolis c states do not normally offer Employers Liability as part of their workers compensa on coverage. This endorsement provides Employers Liability coverage and can be added to an employer s general liability policy and in some instances to their worker s compensa on policy. One final comment considera on needs to be given to employers that lease employees. PEOs (Professional Employer Organiza ons) are widespread and growing. In these situa ons the employer actually becomes a CO-employer with the PEO. A shared tax ID number is u lized. The employer essen ally shares a number of their key employer responsibili es with the PEO while maintaining complete control over their own opera ons. Professional Employer Organiza ons share and/or manage many of the HR func ons and administra on requirements. As such there can also be a shared responsibility should the PEO employee be injured. This obviously would need to be addressed with your workers compensa on carrier. Further discussion of this topic, however, is an issue that would best be reviewed in a separate audio. In summary workers compensa on coverage can provide for a constant revenue stream for agencies while providing both statutory and valuable protec on for employers and employees. The underwri ng and applica on of coverage is of paramount importance when one is wri ng the coverage. Thank you for listening to our presenta on on Workers Compensa on. Each month we are adding new audios to the University Series of audio presenta ons. My next audio will be on Personal Auto Insurance. Also, visit my blog under Laurus Insurance Consul ng on the community Blog. Again, thanks for being a part of the Listen and Learn Audio Series. Page 7