Knowhow: Workers' Comp Insurance | Heed 3 key factors when you shop for a policy
Workers' compensation insurance protects employees from financial hardship after they suffer injury or illness on the job. It pays for direct medical expenses and wage replacement while the employee is unable to work due to the injury. In Massachusetts, organizations with employees are required to purchase it, whether they have just one part-time employee or employees working in other states. (If you do have employees in several states, you may need to purchase additional coverage.)
In Massachusetts, the Division of Industrial Accidents manages the workers’ comp system. It establishes codes for every job type and sets a corresponding base rate. Your company’s base premium is calculated by multiplying your payroll in a given class code by the state-set rate. This amount is then multiplied by your company’s actual claims experience to establish your premium.
The two factors that determine claims experience for businesses are frequency of claims, measured by the Experience Modification Factor (Mod), and severity of claims, measured by the All Risk Adjustment Program (ARAP). The claims history used to calculate these metrics is the three oldest of the prior four years. For example, a 2012 policy looks at claims experience for 2008, 2009 and 2010.
When you’re looking for a workers’ compensation insurance provider, take these three factors into consideration:
1. Claims Management: Efficient claims handling keeps claim costs down and reduces any negative impact to your Mod and ARAP. Some providers offer guidance for developing a return- to-work program. For instance, an employer may have or may create a position with less rigorous physical requirements to allow an employee to return earlier. This helps reduce claim costs. Choosing a provider that offers such assistance can be valuable.
2. Discounts: While the state sets workers’ comp rates, some insurance companies offer a scheduled deviation from them that are guaranteed discounts for the policy period. Other companies may offer a dividend plan, through which the claims experience and discount amount are calculated when the policy year is over. Such dividends are not guaranteed and are generally based on the individual’s experience as well as the overall performance of all policyholders participating in the dividend plan.
3. Proper Classifications: Using proper job classifications for your workforce is essential. While overpaying due to wrong class codes is always a concern, underpaying can be equally problematic, since an audit may result in a large premium adjustment. Working with a knowledgeable agent helps you avoid problems. Policies are audited at the end of each policy term, and a premium charge or credit is made if actual payrolls differ from the estimates used to calculate the original premium.
Workers’ comp — and insurance in general — are only one component of a complete enterprise risk management program. The best advice is to seek a qualified agent you can trust, then work in conjunction with the agent, the insurance company and the insurance company’s loss control department. Accidents happen, but the best way to contain costs is to provide as safe a work environment as possible.
Dennis F. Murphy III is treasurer and a commercial sales executive at D. Francis Murphy Insurance Agency, headquartered in Hudson. Email him at dm3@dfmurphy.com.
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