Intro & Background
While there are guidelines and preparation best practices, ultimately the classification process for workers compensation is unique for each business and is shaped by the perceptions of the infield adjuster. For those that run complex businesses (and what social enterprise doesn’t?), classification can also be complicated and, unfortunately, misclassification can occur. This case study explores an example of misclassification from Isidore Recycling and shares what enterprises should learn to hopefully avoid the pitfalls of misclassification.
(Disclaimer: This is an example of how to approach the process and is not legal advice or official guidance. Always partner with your broker to navigate this process.)
Founded in 2011, Isidore Recycling is a for-profit, women-owned business in Los Angeles providing fair chance employment to individuals with previous criminal justice involvement through an e-waste recycling and resale business. They are a full-service electronics recycling company, which means they take in product and either destroy it in an environmentally safe manner or wipe and destroy data to resell electronic products that are still in good quality. In fall 2015, however, the WCIRB (Workers Compensation Insurance Ratings Bureau) reevaluated the businesses’ classification after a claim was filed, ultimately changing it from warehousing to junk dealer
How does misclassification occur?
There are over 500 classifications, many with broad definitions, in the state of California, and many businesses could theoretically fall into multiple different codes as a result. Ultimately, it is the underwriter who makes the determination of the classification of a business, and this doesn’t necessarily mean that the business-owner and the underwriter will agree.
What is the impact?
A business’ classification determines their insurance rates, as well which insurance carriers will insure them. As a result, a change in classification could impact both. In the case of Isidore, the new classification meant their original insurance carrier could no longer underwrite their policy. Acquiring a new carrier and a new policy under the new classification, resulted in a premium increase of 500%. Unsurprisingly, this had a significant financial impact on the company. Given the impact that the classification has on insurances rates, a business may want to appeal their classification, as Isidore decided to do.
Appealing a classification
1. Involve your broker
They are your representative and consultant, so be sure to get them involved in the process. They’re there to help you through situations like this.
2. Appeal to the appropriate party
If your insurance carrier initiated classification change, appeal to your carrier. If WCIRB initiated classification change, appeal to WCIRB
3. Make your case
Draft letter of dispute, describing your business in detail. State what classification you think you should be.
4. Formal Dispute Process
Appeal decision will be Yay, Nay, or a request for more information. If Yay, you will still need to appeal again and repeat process (steps 1-3)
5. Prepare for your visit
Address concerns listed in original complaint and provide letters of support.
6. Wait for your decision
WCIRB has 30 days to provide a response.
If successful, you will need to stay with your current insurance carrier for the remainder of the fiscal year, or else face a short rate penalty. You will be refunded for the difference in the next fiscal year and your broker can pursue other insurance carriers who underwrite your accurate classification code for next fiscal year. In the case of Isidore, they were able to restore back to their initial classification code.
Tips & Tricks
- Don’t panic and involve your broker right away
- Do your research: no one knows your business like you do
- Always have your broker in the room with meeting with insurance companies
- Prepare for the long haul – this process can take some time
- Secure management and financial support to offset any immediate financial impact
The reality is, this process is more frequent than we would like. You can hope to avoid accidents by incorporating safety plans and promoting a healthy workplace and can prepare for audits by being as descriptive as possible. Regardless, if this happens to you: don’t panic and call your broker. Prepare to provide clarity on how your business really works. Remember, you are your own best advocate!