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Tuesday Morning Insurance Tidbit - Workers Compensation


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Good Morning A D I !!!!!!

     Ah, here we are again, Tuesday!  Where does the time go?!?!!?  It seems like we just had last week’s installment of the “Tidbit”, but here we are again.  I truly do hope that you enjoyed your long weekend and took the time yesterday to remember all of those who have severed our great nation.  Freedom most certainly is not free, and so many have given so much, and we all need to remember that daily, not just on Memorial Day.  To those that have served, no matter the capacity, THANK YOU!  You allow us to do what we do and enjoy being able to do it in the greatest country on earth!

     With that, let us get on to today’s installment of the Tuesday Insurance Tidbit.  Today I have something very special on tap for you …  a delicious serving of Workers Compensation!  Mmmm … Doesn’t that sound tasty?  From the aroma, to the way the light glistens off of it, to the full-bodied texture of the policy … who doesn’t enjoy a good taste of Workers Compensation now and again?!?!?!?!

     Workers Compensation, Work Comp, or WC, as it is known, is often viewed as a “necessary evil”.  Why is it a necessary evil, you may wonder?  The reason for this is because for many distillers, brewers, vintners, etc., it is a “must have”, and for many it can be one of the most expensive policies that you are required to purchase by state law. 

     So, what exactly is WC?  I am glad you asked!  At a very high-level view, Work Comp is a type of insurance that assists in providing a type of wage replacement, as well as medical benefits to your employees if they are injured in the course of their job/duties while working for you or your business.  You provide (and in most cases are required to provide, as we will see) the employee with workers compensation benefits in exchange for the employee’s relinquishment of their rights to sue you or your business for injuries sustained while on the job for any tort negligence.  Although various states have different requirements, WC policies generally provide for compensation for lost wages due to injuries, as well as reimbursements for medical bills due to work related injuries, and in some cases, pay benefits to dependents of a worker if they are killed in the course of their job duties.

     WC is typically “compulsory” in most states.  For those of you recovering from a long weekend, that means it is required by law.  There are exceptions to this, however, but Work Comp is always a good idea, and it is one more protection for your most valuable assets, your employees.

      Workers Compensation rates are created based off of several different areas specifically with your individual business in mind, and are based on your specific business.  This is known as your “experience rating”.  The experience rating compares your business to other business’ in the same industry grouping through an averaging of these rates.  Each individual business is compared to the industry grouping as a whole, which is known as an “experience modifier”, “Ex. Mod.”, or in super-cool insurance-speak, “X-Mod”.  (Not to be confused with “X-Men” which is a Marvel trademarked bunch of other superheroes that are not associated with me, your all-knowing and loving InsuranceMan 2.0!!!) If your business has a better loss ratio than the grouping as a whole, then your X-Mod. would reflect that on your rating sheet.  However, if your losses are greater than the average, then your X-Mod. would be higher than the average and that will also be reflected and drive your premiums to be higher than others in the same grouping.

     The reasoning behind this is due to the fact that it provides an incentive to control work related injuries and keep them to a minimum.  The less injuries/claims, the lower your premiums.  Also, it encourages employers to return workers back to their duties as quickly as is permissible.  Obviously, this is calculated by our favorite folks, the actuaries (read my past posts to get a feel for these people) to make sure that enough premium is being charged in order to offset any potential losses.

     OK, now you may be thinking, “So what does all that really mean to me?”  Again, so inquisitive, dear reader.  Well let me tell you what it means.  The premium calculations are determined by multiplying your rate times each $100 worth of payroll.  “In simple math, please!”  Right!  Sorry.  This means that if you have $250,000 in payroll, you would divide $250,000 by 100, equaling 2,500.  Pretty easy, right?!?!?  Well, not so fast.  That is only known as the “manual premium” in WC terms.  Cool, huh?  Who knew you would learn so much?  InsuranceMan 2.0!!! knew it, that is why I write these for you!  The manual premium is only an indication at this point and has not yet taken into account your X-Mod. discussed above.

     So now what happens?!?!  Well, X-Mods. are typically based on a 3-year loss cycle, also known as an “experience period”, but they are generally calculated each policy year.  X-Mods. have an average rating of “1”, meaning that a rating of 1 is right in the middle of the pack.  Not good, not bad, but average, just as you would assume.  If you have been in business for 8 years with no losses, your X-Mod. could be below a 1.  If you have been in business for 3 years with several small losses, or one big loss (An aside here, it is better to have one large loss then several small losses.  It is a “frequency vs. severity” issue.  I may discuss this at a later date), you may have an X-Mod. much greater than 1.  See, again, it is all based on your individual and specific business and your history.

     A simplistic example of this would be that you have been in business for 3 years and you have typical losses and your X-Mod. is a 1.  Given the above payroll of $250,000 then, you would divide $250,000 by 100 giving you $2,500.  You would then multiply the X-Mod. of 1 against the 2,500 and end up with 2,500 x 1 = $2,500 in premium.  (Do keep in mind here that carriers will often charge some other associated premiums or fees to offset the state guarantee fund or for other reasons, but we are just trying to keep this simple, Mmm-kay?)

     Another, more advanced example would be you have been in business for many years, but due to some workplace incidences, your X-Mod is a 1.75.  You would then take the above payroll of $250,000 and divide it by 100 giving you the same 2,500.  Now though, you would multiply the 2,500 by 1.75 and end up with $4,375 in WC premium.  Ah!!!!!  Now you can see the incentive to keep your accidents/injuries lower.  By keeping your accidents/injuries lower via training, safety procedures, etc., you could have saved yourself $1,875 annually in work comp premium!

     Again however, these are fairly simplistic examples and real Work Comp policies contemplate several aspects of payroll.  For instance, if your $250,000 in payroll is comprised of $50,000 for bookkeeping, $150,000 of distillery operations, and $50,000 of bar/tasting room payroll, then each of those would be broken out into their own classification and rated independently based on each of their own X-Mods.  MAN, THIS IS SO COOL!!!!!!!!  Sorry, my “insurance-nerd” is showing! 

                                                                                 *****WARNING: COSTLY INSURANCE PITFALL ALERT AHEAD *****

     The above-mentioned is one of the biggest areas in which inaccuracies can arise and result in a costly mistake.  Potentially a several thousand-dollar mistake!  Be careful here!  Some classification codes through the National Council on Compensation Insurance, or NCCI, can be split out by the amount of payroll that a multi-functional employee severs, and some cannot!  Let’s say that you have an employee that spends some of their time in the distillation operations, and some time working the tasting room.  “Well, I will just split their payroll out by how much I am paying them for each function, right?!?!?!”  Well, maybe right, maybe wrong.  In the case where you have an employee (or several) that perform multiple functions (and we all know that this happens, jack of all trades around the distillery), their payroll may be able to be split between each function, maybe not.  The NCCI may have exclusionary terms in their definitions that state if an employee is doing other associated tasks, then those are either needing to be contemplated in the highest hazard code, or they may have to be split out.  Super confusing, right?!?!?  An example is as follows:

2130 SPIRITUOUS LIQUOR DISTILLERY – Includes grain alcohol manufacturing. Warehousing, blending, rectifying or bottling to be separately rated as 2131 – Spirituous Liquor Bottling. CROSS REF. Alcohol Manufacturing – Grain – All Operations.

     As you can see, if your employee is engaged in distilling only, we would classify all of their payroll into the 2130 category.  However, as you can see in RED, if they are warehousing, blending, rectifying or bottling, those would need to be separately classed under the 2131 classification.  Well, what if they are working the tasting-room as well?!?!?  Then we have to allot the correct amount of their payroll to that role as well!  Again, sometimes you will get into a situation where their entire payroll has to be classed into the highest rated job hazard that the employee performs, sometimes it can be split out, but you better make sure you (or your agent) know which-is-which so you can avoid spending too much, or not enough!  Cue the music as the dreaded “Audit” is about to take place!!!!!

     I know this is getting long, but I am here to inform, and that does not always just happen in a few paragraphs, so stick with me, we are almost done.  Now, with all of that amazing information given above, you must also keep in mind that each state has its own set of governing requirements and regulations.  Some states require EVERYONE be covered; some states don’t care.  It may depend on if the employee is full-time or part-time.  Other states only have WC policies that can be purchased directly from a state governmental entity.  Most states fall somewhere in between.  Here are some quick examples of varying regulations to illustrate the point:

     ALABAMA:  Only employers with 5 or more employees (including an officers) are required to carry WC;

     ALASKA:  Any business with 1 or more employee must carry WC;

     California:  All employers must provide workers compensation, only Sole Proprietorship with no employees may opt out;

     Illinois:  Workers Compensation is required on all employees, even if it is only (1) part-time employee;

     Indiana:  All employees must be covered, but Sole Proprietors, Partners, and Managing Members may opt out of coverage;

     Kansas:  WC is mandatory for any employee making over $20,000 annually;

     Massachusetts:  All employees, including owners must be covered;

     Minnesota:  I throw this one in because it shows how weird and specific this all can get! Check this out:

2018 Minnesota Statutes


Subdivision 1.Employments excluded. This chapter does not apply to any of the following:

(15) persons employed by a closely held corporation who are related by blood or marriage, within the third degree of kindred according to the rules of civil law, to an officer of the corporation, who is referred to in clause (7), if the corporation files a written election with the commissioner to exclude such individuals. A written election is not required for a person who is otherwise excluded from this chapter by this section;

     WHAT IS UP, MINNESOTA?!?!?!?!  ”… within the third degree of kindred according to the rules of civil law …”?!?!?!!?!?  Wow, they are super-duper specific here!  It actually has a lot to do with farming/agriculture if you must know, but again, you can see how varied the states are.

     Texas:  OPTIONAL!  Ah, good ol’ Texas!!!  They ain’t gonna’ have nobody tellin’ them what to do!  In Texas, the only WC that is required is if you are in the construction business and you are having your employees on a governmental work site.

     Let us not forget North Dakota, Ohio, Washington, Wyoming, Puerto Rico, and the US Virgin Islands.  Those states/territories are considered “Monopolistic” states whereby the only workers compensation insurance policies must be provided by the state plan.  This brings up other issues such as “Stop-Gap” and a few other items, but I am not going to get into that here.  If you are in one of these places and you have questions, you know that you can call me.

     Last but not least is the question of “volunteers”.  UGH!!!!!!!  InsuranceMan 2.0!!!  MY BRAIN HURTS … STOP!!!!!!!”  I know, I know, dear reader.  I often use my powers of droning on about insurance to vanquish my arch-nemesi, but I don’t want you to suffer, my dearest friends, so I will be quick.

     In regard to volunteers, first, check with your state department of labor if you have questions.  Their contact information can be found here: http://www.dol.gov/whd/contacts/state_of.htm ).  In many states, volunteers would be considered guests or permissive users, and nothing really has to be done.  If they get hurt, it would more than likely fall under your overall general liability, but be careful!  In other states, volunteers may need to be added to your WC policy via a “Volunteer Worker Endorsement” but this can cost you.  Often times this is the best way to make sure your “bottling party” folks would be covered if they are injured, but there is often “assumed wage” language whereby you would be charged a premium as if these folks were making the “assumed wage” of what an employee doing this task would normally be making.

     Basically, in the end, given the role that each employee serves, to if their payroll can be split or not, to who is required to be covered, to where you can even purchase coverage from, to ensuring volunteers can come in and assist you, there are a lot of things to consider.  Do you want to try and figure this out on your own or do you want someone with Insurance-Superpowers to come to your assistance?!?!?  We all know the option you are thinking in your minds.  That is why I, InsuranceMan 2.0!!!, am here to save the day!!!!!!  I think you should be getting in contact with me, don’t you?


Until next time, dear reader …

Stay Vigilant!

Aaron Linden

a.k.a InsuranceMan 2.0!!!



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