Taking the Mystery Out of Worker's Compensation

Large or small, all propane marketers that have employees must, by state statue, purchase worker’s compensation.

But what is worker’s compensation? Who do you call? What insurance company should you choose? What insurance plan is available? What about deductibles? Am I big enough to self-insure or form a captive insurance company? Are there any alternatives to obtaining W/C? What about my multi-state exposure? These are some of the questions that insurance agents are asked when propane marketers are looking to purchase the coverage.

The next group of questions are usually based on the cost of W/C. I’m the owner, why should I buy W/C coverage for myself? We have never had a W/C claim, why can’t we be given credit for our good loss record? What do you mean we have to come up with  additional premiums based on the audit?
Let’s take the issues one at a time.
What is worker’s compensation? A mandatory insurance policy in which the propane marketer accepts liability for work related injury or death regardless of fault. Covered losses applied to bodily injury and disease that “arise out of and in the course of employment.”

The W/C policy provides the injured employee medical, loss of income, death, and rehabilitation benefits.

In addition, the W/C policy provides employers liability to protect against a variety of common law exposures. Although an employee gives up the right to sue the propane marketer in exchange for W/C benefits, successful lawsuits have been brought by children and spouses of the injured worker that are covered under employers liability.

I need W/C. Who do I call? The first person to call is your insurance agent, who is handling your property and casualty program. Many insurance companies that write property and casualty ( P&C) coverages for the propane marketer are willing to provide W/C coverages on risks that they already insure.

Secondly, in thirteen states, a state compensation fund has been created to compete with private insurance companies for the right to write your W/C coverages. Usually the state funds write coverage in conjunction with association safety groups, and, as such, offer the possibility of a dividend if all the members of the association have an acceptable loss ratio.

In five states, W/C coverage is only available from a monopolistic state fund, and no private carriers are permitted.

The difficulty for most propane marketers seeking W/C is that many of the insurance carriers are looking for risks that generate over $50,000 of annual W/C premiums, and they are not willing to write the smaller propane marketers.

How do you arrive at my premium? The National Council on Compensation Insurance has established classification codes and descriptions for almost all classes of business. They also keep the statistical data comparing premiums to losses by classification for the various states and they then establish the basic rates in most states.

There are a few states that allow the insurance companies to file and use their own rates and this allows for a wide discrepancy in W/C premiums.

In either case, the premium is based on the remuneration paid or payable by the propane marketer for the services of the employee in each classification times the rate for that classification. The rate is per $100 of remuneration.

Many propane marketers forget that remuneration is more than just payroll. It includes commissions, bonuses, holiday pay, vacation pay, sick pay, profit sharing, and incentive plans. However, overtime pay is computed on a straight-time basis.

The premium computation would then look like the following example:

The next step is to apply a rating device called an “experience modification factor” to the standard premium. The factor is a way in which each propane marketer is compared against other propane marketers to determine if they are above or below average, based on their claims history.

Safety does pay when it comes to buying worker’s compensation. A company that has a number of claims is going to pay more for W/C than the company that is extremely safety conscious. This adjustment is made by applying the experience modification to the premium.

A brand new start-up company or a company just acquired will pay the state rate times the payroll, as their experience modification is 1.00 (.’80 in the example above). This company in hypothetical example would pay $4,000 for workers’ compensation, thus getting a break for a good claims record.

A propane marketer could also have an experience modification debit. With a debit experience modification factor of 1.20, our marketer would pay $6,000.

The experience modification factor for each company is established over a four year period. The most current year is excluded and the prior years of premiums and losses are used as the basis. There is also a minimum premium requirement to qualify.

For example, a policy that normally expires on July 1, 2000: the July 1, 1999 to July 1, 2000 year would be excluded;  July 1, 1998 to July 1, 1999, July 1, 1997 to July 1, 1998, and July 1, 1996 to July 1, 1997 policy years would be included in the experience modification rate for the July 1, 200 renewal.

The wise propane marketer focuses on the prevention of accidents, which keeps W/C  experience modifications and, thus, its premiums down.

Next installment: W/C programs, alternatives, and claims handling.