The challenges and complexities of California Workers’ Compensation, and tips for navigating the classification process.
Workers’ compensation is a very important topic and can have a large impact, both financially and time-wise, on social enterprises. Let’s begin with a brief overview of what workers’ compensation is, besides a source of stress for business owners. Workers’ compensation is the system by which no-fault statutory benefits, prescribed in state law, are provided by an employer to an employee (or the employee’s family) due to a job-related injury (including death) resulting from an accident or occupational disease.
The “no-fault” system means that employees “need not prove the injury was someone else’s fault in order to receive workers’ compensation benefits for an on-the-job injury.”1 As a result, employees know they are protected if they get injured at work and that there are benefits available to help take care of them and help them get back to work.
The benefits that the employees receive are statutory, meaning the state prescribes the benefits that they receive. It’s also the exclusive remedy, preventing the employee from suing their employer, unless the employer does something that could be considered grossly negligent.
The broker is your representative with an insurance carrier. They’re going to help find insurance carriers that will be a good fit for you and your business. The broker acts on your behalf to help with the transaction of the insurance and they’re going to help you with service issues that arise. So whether you have an issue with an audit or a claim, your broker is your resource.
The insurance carrier is the company that provides the workers’ compensation benefits.
The Workers’ Compensation Insurance Rating Bureau (WCIRB) act as the statistical agent for the Department of Insurance. They collect data from different insurance companies and are looking at trends in the market. They understand what loss trends in the state look like and what direction certain trends are heading in, which helps the insurance carriers with understanding predictability.
Regional differences in California
The workers’ compensation insurance system in California is over 100 years old. There are more than 220 insurance companies that provide workers’ compensation insurance coverage to nearly 700,000 employers, and deliver medical and wage replacement benefits to almost 800,000 injured workers and their families annually. As we’ve seen the economy improve nationwide and in California, payrolls start to go up and businesses are starting to do more business. As a result, California made up 29% of the nationwide workers’ compensation market in 2015.
Recently, insurance carriers have started to pay more attention to the way that different areas of the state sort of perform from a workers’ compensation perspective. Perhaps unsurprisingly, there are distinct differences between areas such as the Bay Area and Los Angeles, for example. The Bay Area tends to have wage and benefit levels that are higher than Los Angeles, as well as different industry types – there are more technology companies in the Bay Area, and more manufacturing operations in Los Angeles. There are also differences in litigation trends, where claims in Los Angeles have a greater frequency of litigation than in the Bay Area. These differences will carry through to differences in premiums in the two regions. As a result, a Bay Area social enterprise that is very similar to a Los Angeles social enterprise may have a lower premium due to these different regional trends.
How an underwriter looks at a business
Regardless of your insurance carrier, there are some basics that all underwriters will look at:
- Supplemental application
- 3-5 years of loss runs
First, they’ll review the two-page industry-standard application. This document will include your payrolls, details on your ownership structure, and a brief description of your operations. They’re going to look at your payroll trends. They want to see whether your payroll is growing, shrinking, or is stable. They are going to look at the characteristics of your business and see how your business looks in comparison to other businesses in the same industry.
Next they’ll review the supplemental application. This document can be up to three pages long and fills in some additional information on top of the initial application. For example, if you run a machine shop, this will provide the underwriter with information about your machine shop – such as whether the machines are all guarded, if personal protection equipment is provided, or if you have drivers.
They’re also going to review three to five years of loss runs. If you’ve had a business that’s been in business less than three years, then they’re going to want the loss runs for the number of years that you have been in business. In reviewing the loss runs they’re looking to see how your accounts performed and how your losses develop from year to year.
Let’s take a look at the following two social enterprises, each with different trends in employee count, payroll, and loss histories.
For Social Enterprise 1, we can see a relatively stable employee count and payroll. The losses are also relatively stable from 2012 to 2015, although there is an $80,000 pay out in 2016. However, even with the payout in 2016, these are pretty consistent losses and the underwriter may be confident in the overall predictability.
On the other hand, Social Enterprise 2 has a volatile employee count – up nine-fold from 2012 to 2013, but cut in half by 2015, only to double the next year. Similarly, the payroll is all over the place and the loss history is not too predictable. So if an underwriter has a choice, and can only write one of these accounts, they will almost certainly choose Social Enterprise 1, because it appears to be relatively stable and predictable.
Presenting a strong case
Know and understand your trends
Have an idea of what your employee count and payroll does from year to year, and what your losses look like from year to year. If you have a payroll jump or a decrease, make a note of it and make sure that it’s explained when your account is being presented to underwriters. Maybe you had a payroll decrease because part of the operation is no longer in existence, or it got sold off. Maybe you had a payroll increase because you had a large order come in for something, and the organization grew. Make sure those are explained and underwriters will then, in turn, have some context and reasons for the volatility.
Communicate reasons for abnormalities and corrective measures you took
This is especially important for any claims you may have had. For example, say you had a large number of claims due to employees getting injured by a certain piece of machinery. Be sure to explain to the underwriter not only that the piece of machinery was the cause of the injuries but that you have replaced the piece of machinery to prevent further injuries.
Describing your operations
When presenting your social enterprise to an underwriter, it pays to be detailed. An underwriter will only know about your business what you tell them, so omissions only leave room for uncertainty. And as we’ve seen so far, uncertainty is the opposite of what underwriters are looking for. Let’s take this example:
Description of operations: Janitorial company
This example is an extremely terse description of the type of company, in this case janitorial. It provides no information on the type of janitorial services offered, the actual type of work the employees do, or where this work is performed. In the absence of information, an underwriter’s imagination is left to fill in the blanks. Let’s take a look at a better example:
Description of operations: Janitorial company performing light cleanup of office buildings. In support of operations employees perform light dusting, vacuuming, and empty trash containers. Employees work in teams. All work is feet on the ground.
In this example, the underwriter will learn much more about the business. They will know that the employees work in teams, so if an employee gets hurt, they know there’s another employee that can help get the claim reported to management or supervisors. They will know that they’re performing light cleanup of office buildings, and the kind of work they’re performing.
So be sure to think through the characteristics of your business. Think about what you do differently from others in your industry, and highlight that in your submission to the underwriter. A good way to do this is to draft a narrative, putting in writing a description of everything that your business does that will be viewed in a positive light. It’s a good way of presenting, even selling, your business to the underwriter.
In addition to being extremely important in its own right, safety is what prevents losses from happening. Unsurprisingly, underwriters will want to know a lot about the safety programs you have in place. So ask yourself:
- What is your safety program? Do you have one?
- If you do, is it a formal safety program?
- Do you have a safety committee?
- Do you have safety policies in writing? Is there a structure to your safety program?
- Do you have an injury/illness prevention program?
If the answer to any of these questions is “no”, it may be a good idea to look into putting these programs in place. For help putting together an injury/illness prevention program, the Department of Industrial Relations have created an eTool that you can use to help.
As a general rule, be sure to have a formal written safety program and have an injury/illness prevention program in place. These will help your company prevent injuries and help people get back to work faster if injuries do occur. As a result, they prevent losses from occurring and underwriters like to see them, so they are definitely something you should have.
There are over 500 class codes in the California workers’ compensation system. Here’s an example of one:
We can see that this is class code 0042, which is the landscape gardening class. The footnote shows all of the businesses that an insurance carrier and rating bureau would consider for this classification. As you can see, it’s a pretty wide net and quite a few different operations that could fall under this.
Whenever you get a new policy with an insurance carrier, make sure you are getting a claims kit from that insurance carrier. This will provide you with phone numbers, various contact information, and details on your medical provider network. It will help guide you through the process of what to do when you have a claim. Be sure to know how to report claims with your carrier and make sure you’re reporting claims timely. You should have your claims reported within a 24-hour time frame and have set procedures that you’re following each time there is a claim.
Unfortunately, there are instances where you may want to dispute the decision of the insurance carrier, Your insurance policy contains information on how to submit a dispute. First and foremost, be sure to submit your dispute in writing to your insurance carrier. When you do make a note of when you sent that dispute to the carrier and who it was sent to. Be sure to cc your broker on the dispute, and make sure they are involved and help you understand the process that you’re going through.