Even for those in the insurance business, workers’ compensation can be complicated. Here are answers to some of the most common questions we get from independent insurance agents.
Which employers qualify for an experience modification factor (e-mod)?
In Minnesota, an employer must have at least $10,000 in annual premium developed in the last year or last two years. If the business has more than two years of loss history, an average annual premium of at least $5,000 is required.
The thresholds in SFM’s other core states are:
- Wisconsin — $7,000
- Iowa — $3,750
- Nebraska — $3,000
- South Dakota — $3,750
Which factors impact the e-mod?
Loss experience, class code and types of claims all impact the experience modification factor (e-mod). The e-mod shows whether an employer’s loss experience is better or worse than average when compared with other employers of similar size and type. This means misclassifications can hurt an organization’s e-mod. For example, let’s say a social service organization is misclassified as a school. Because on average, schools have lower losses than social service organizations, this particular organization’s e-mod will be worse than if it were measured against organizations of the same type.
Claims that involve lost time from work impact the e-mod much more than those that remain medical only because the costs of medical-only claims are reduced by 70 percent when calculating the e-mod. This is why early return-to-work is so important.
When claim costs rise over a certain amount, they are also discounted and at certain levels capped when calculating the e-mod. This amount above which they are discounted is called the split-point. It ranges from $13,500-$16,250 in SFM’s core states of Minnesota, Wisconsin, Iowa, Nebraska and South Dakota.
What happens to the workers’ compensation policy when ownership changes?
All ownership changes should be reported to the insurance company. Changes such as a majority ownership change could potentially change the e-mod ratings and which entities are covered by the policies. When a business is bought out entirely and taken over by new owners, typically the new owners will retain the previous owners’ loss experience. When multiple operations are being combined, that’s when things can get more complicated. At SFM, if ownership changes, our process is to cancel the current policy and write a new policy for the new owners to establish a clear line for liability and financial responsibility.
If an employer has people working in other states, when do those states need to be listed on the policy?
Every state has different requirements regarding when they need to be listed on the policy in item 3A. If an organization has employees working in multiple states, it’s always a good idea to check with the insurance carrier or the respective states to make sure the listing of the states in item 3A meets the individual state requirements.
How do you determine the workers’ compensation premium price for an individual business?
Here’s how it works in Minnesota:
- We start with the pure premium (also called loss costs) developed by the Minnesota Workers’ Compensation Insurers’ Association for the business’ individual class code. A riskier class code will have a higher pure premium or loss costs.
- Next, we multiply this by the loss cost multiplier (also called load factor), which is intended to cover the insurance company’s costs, such as claims adjusting, bill review, loss prevention services, taxes and other administrative expenses. Loss cost multipliers vary by company.
- Then we take that number (called the base rate) and multiply it by total payroll, and divide that by 100.
- Next, that number is multiplied by:
- The e-mod (a multiplier based on loss history) if the insured qualifies for an e-mod.
- The schedule mod (a credit or debit based on whether the company has taken significant safety precautions or has jobs that are more hazardous than average for the class of business respectively). Note that not all states permit the use of schedule rating.
- After that, any premium discounts (going to policyholders over $5,000 in premium in Minnesota due to the lower administrative cost of servicing one large account versus multiple smaller accounts), Minnesota Contractors Premium Adjustment Program credits, and additional fees, such as the required Terrorism Risk Insurance Act fee and the expense constant (a fixed fee covering costs such as issuing and auditing policies) are applied.
- Additional premium is also charged for employers’ liability coverage or coverage B.
- Lastly, a State of Minnesota Special Compensation Fund Assessment is charged in addition to premium. It goes toward benefits for injured employees of uninsured companies as well as expenses for operating the workers’ compensation system in the state. The formula to calculate the charge is: pure premium rate x payroll/100 x e-mod + employers’ liability charge x special compensation fund multiplier (7.5652 percent in 2016).
For an example of what this might look like for an individual policyholder, see the image below:
Calculating workers’ compensation premium can differ by state. For example, Wisconsin does not use loss cost multipliers.
When should a waiver of subrogation endorsement be used?
A waiver of subrogation endorsement states that the insurer cannot seek restitution from (subrogate against) a specified third party if contractually required, even if the third party is to blame for a loss. For example, say a contractor working at an employer’s business leaves a ladder laying across a walkway, causing an employee at the business to fall and sustain a work injury. If there was a waiver of subrogation in place for the contractor, the employer would not have an opportunity to recover any restitution from the contractor and the entire loss would be included in that employer’s lost history and experience rating. This is why waivers of subrogation should not be taken lightly. Waivers of subrogation vary in price in Minnesota depending on the type of waiver, policy size and job size.
What all is included in payroll?
In Minnesota, the Minnesota Workers’ Compensation Insurers Association basic manual specifies items that are considered part of payroll. The list includes: bonuses, allowances for hand tools, value for lodging, draws, holiday, vacation and sick pay. The manual also lists items excluded from payroll such as supper money for late work, work uniform allowances and severance payments.
Why is an annual workers’ compensation premium audit necessary?
Audits must be completed every year to determine whether the premium charged and class code used was correct. For more details, see our Workers’CompEssentials blog post on premium audits, and the video below.