The Importance of Workers’ Comp Insurance


It’s one of those parts of the business that nobody likes to deal with, but if you ignore workers’ compensation insurance, it can put your business, and even your personal assets, in jeopardy.

Workers’ comp is mandated by the state governments and is also required by the federal government on federal properties and in maritime operations. At its core, workers’ comp is the statutory requirement that an employer provide an employee coverage for medical costs and some percentage of lost wages in the event they are injured in the “course and scope of employment.” Injuries that occur as a result of the negligence of the employee are still subject to coverage under workers’ compensation. Except in unusual situations, the employee may not sue the employer in negligence for injuries received on the job.

This is a simplified description of workers’ comp, and there are differences between various policies in various states and jurisdictions. It’s important to check the specific regulations in your state.

“It’s called workers’ compensation, but there’s really two parts to it: workers’ comp and employer’s liability,” explains Sue Treece, program manager with Hotchkiss Insurance Agency’s workers’ comp group. “Workers’ comp covers medical payments. If you cut off your finger on the job, there’s a compensation for that loss of limb based on whether it’s a permanent disability, a partial disability, a permanent-partial disability, etc. It also pays medical and doctor bills. And, it provides indemnity — a lot of business owners think they don’t need workers’ comp because they have health care for their employees. But, health insurance doesn’t pay their paycheck, workers’ comp does. Finally, it protects the employer against suits by the family of an employee.”

Hotchkiss Insurance Agency offers workers’ comp policies through Texas Mutual, which has a special Texas Green Industry Workers’ comp group program. That program is endorsed by the Texas Nursery and Landscape Association and the Texas Turf Irrigation Association.

All states require companies to carry workers’ comp policies. “Texas is the only state left that includes a provision for companies to opt out of that law. Employers have to file a form every year declaring that they don’t want to participate under the law,” says Treece. “By doing that, they’re giving up all their common law defenses if they’re sued. And, it’s a bad message to send to employees. It’s saying to employees, ‘We don’t care enough about you to insure you for your health and safety.’”

Allen Bradley, president and CEO of Amerisafe, says that workers’ compensation insurance is especially critical for those working in hazardous industries. “All we write is workers’ comp, and we specialize in insuring people who get their shirts dirty when they go to work,” Bradley says of the loggers, construction workers, truckers, farmers, arborists, landscapers and others to whom Amerisafe provides policies across some 30 states.

Bradley says that because workers’ comp insurance is subject to state regulations, “there’s a certain variability” in regulations from state to state. “There are different approaches to it, different benefit levels, different mechanisms for determining disabilities, there are medial fee schedules in some states, etc.,” he explains. Florida, he says, is one of the most unusual states. “There, the state actually sets the rates. Then, if insurance companies make more than a 5 percent underwriting profit for a three-year period, they have to give the money back to the policyholders.”

Each state has something called a statistical agent; in most cases that is the National Council on Compensation Insurance. Every type of job in every state is assigned one of about 600 class codes. “The statistical agent receives data from employers and self-insured employers as to the payroll for each job and the losses in each job. From that, they develop what the anticipated losses per $100 of payroll are, and that becomes a loss cost. For example, the statistical agent might develop a loss cost of $10 for an arborist. That’s for every arborist in the state, based on the experiences in that industry,” says Bradley.

At that point, he explains, each workers’ comp insurance company in that state adjusts its rates based on their own experiences for that industry, and then finally adjusts the rates again based on the performance of each individual company it insures. For example, based on its experiences in the arborist industry, an insurance company might decide they need a loss cost multiplier of 1.4. When multiplied by $10, that becomes a base rate of $14. Based on how good a risk or how bad a risk an individual company is, an employer might pay as much as $17.50 or as little as $10.50 per $100 of payroll.

“There are some things businesses can do to control their costs,” says Bradley. One of the things that drives costs for individual accounts, he explains, is their experience rating modifier, or e-mod, a calculation that’s typically done after a company has had premiums over $5,000 for three years. (For a company that has premiums over $15,000, that experience modifier might be calculated after a single year.) “If you’re absolutely average for the industry, your e-mod will be 1.0. If you’re better than average, it might be .9, so you’ll then pay only 90 percent of an average account.”

The e-mod is driven by safety in the workplace and is based on payroll. Those with fewer than expected accidents for that industry/payroll will have a lower e-mod. The number of accidents is more important than the severity of the accidents, says Bradley. “If two companies each have a $100,000 payroll and the first company has seven accidents, none costing more than $5,000, and the other company has one accident totaling $1 million, the latter company will have the lower e-mod. Because the rates assume that bad things are going to happen from time to time in the workplace, but when you have a frequency of claims, the assumption is going to be one of those claims is going to be a bad one at some point.”

“We had an account not long ago that had a $3 million claim that we had to pick up, but we offered renewal to them because it was a non-at-fault accident that it would be unreasonable to expect there was anything the individual could do to avoid it,” says Bradley. And, he adds, even if it was an at-fault accident, the employer would be evaluated on a bigger picture in terms of future coverage: “Do they train their people right? Do they try to make sure they have a safe workplace? Those are the characteristics that Amerisafe and other insurance companies want to know about.”

Amerisafe takes the somewhat unusual step of sending a representative out to personally meet with nearly all of the employers that it insures prior to issuing a quote. “We’re not insuring department stores, we’re insuring people who are involved in difficult manual labor, so we like to go out and see how they do things,” says Bradley. “We send safety engineers out and watch the companies do business and look through their safety manuals. Even if we don’t write that account, we provide suggestions for how they can improve safety. We’re not trying to ‘catch’ people; it’s not a fraud inspection. The biggest thing we’re looking for is management’s attitude toward safety.”

For those companies that Amerisafe does insure, the personal contact continues in the event an accident occurs. “If we receive a notice of an injury estimated to cost $10,000 or more, that begins a process where our claims adjuster has 72 hours to make a three-point contact: with the claimant, the employer and the health care provider. If you ignore a person who’s been hurt on the job, it’s going to cost you a lot more money. You want to make sure the worker gets the best medical care that’s appropriate for the case,” says Bradley. It’s also important to help the employer to respond to the employee’s requests, he adds. So, it’s important to look for a workers’ comp insurer that will provide that level of assistance.

Treece recommends that companies get involved with their trade associations. In Minnesota, for example, The Builders Group offers workers’ comp programs endorsed by the Minnesota Nursery and Landscape Association. Networking with others in your association can also provide guidance for choosing the right workers’ comp provider, and for cutting costs.