Work Comp Glossary/Terms

This glossary is not intended as exhaustive knowledge base of all terms related to the work comp industry. There are many such glossaries on the web. Some glossaries you’ll find are related to only the claims side of the business.

Rather it’s purpose is to illuminate the most commonly used terms for those interested in seeing improvement in their Work Comp program.

Gaining familiarity with these terms can form a start point for you to learn more about how you and your agent/broker can work together as you seek better results from your coverage program. If your broker does not have full understanding of these terms then you may have to ask why he/she is representing you at this time.

A   |   B   |   C   |   D   |   E   |   F   |   G   |   H   |   I   |   J   |   K   |   L   |   M   |   N   |   O   |   P   |   Q   |   R   |   S   |   T   |   U   |   V   |   W   |   X   |   Y   |   Z

A

Audit/Audit premium:
Policies are audited at the conclusion of each policy year. Specifiacally, the audit concerns the payroll which was actually paid to staff during the policy period. Typically, an estimate of payroll is provided to the carrier at the start of the year, and the purpose of the audit is to find out if the actual payroll is higher or lower. If higher, you will owe Audit premium, if lower, you receive a credit. Audit premium is legally owed, therefore it is strongly recommended that you provide a solid estimate of payroll, and if your staff payroll increases measureably during the year, inform your agent so that he can make appropriate adjustments.

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B

Broker of record letter:
This letter authorizes the current policy to be changed from one agent/broker to another. The advantage here is that you may like your current insurance carrier, but not the broker. This change can generally only take place at the renewal time.

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C

Certificate of insurance:
This is a vital document to obtain if people perform work for you on a sub-contracted basis, typically in construction.

Just because you report contract payments to companies or individuals via an IRS 1099 form does not automatically remove them as covered persons on a work comp policy. They must have their own coverage, and prove it to you via a Certificate of Insurance. Obtaining such a certificate is vital because your premium auditor, (see audit) will seek to match your 1099 payments to a specific certificate of insurance. Once you obtain the certificate, you should call the insurance carrier listed to make sure the policy is indeed in effect. A related concern about this issue is that people you have contracted with CAN become your staff and CAN make claims against your policy. These claims can have a detrimental effect on your long-term rates.

Class code:
Every job function is classified by a code number, (not by the insurance company, but by the Workers Compensation Insurance rating bureau – WCIRB – https://wcirbonline.org/wcirb/answer_center/classification_information.html). The insurance carriers (usually do their best to) follow bureau guidelines as they assign codes to your policy.

The burden of making sure your codes are correct is on the employer. Since most employers don’t know each and every code and their associated rules, the best way to make sure you have the proper codes is to make sure you have a knowledgeable broker. The insurance carriers will do their best to properly code your job functions, but it is ultimately not their responsibility, and if errors are made they can bill you for the difference. Carriers are usually more concerned about errors in their favor, and less concerned about those that cost you money.

Credit modifier:
A credit the insurance carrier provides to your policy for safety or underwriting measures they see that your business has taken. Ways to obtain a credit can be: providing medical or similar benefits to your staff, holding consistent safety meetings, have low or no instance of claims, utilizing preferred industrial medicine providers, first-aid claims procedures and other measures your agent/broker or underwriter may explain.

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D

Debit modifier:
A debit the carrier adds if they see that your company has experienced difficulties with losses, and doesn’t participate in safety steps listed above.

Dividend:

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E

Estimated annual premium:
The initial premium quoted by the insurance carrier, and includes the payroll estimate you provided to your agent/broker who then provided it to your carrier. This is not a final premium, it will be adjusted by the actual payroll the auditor computes at the conclusion of your policy year.

Experience Modification:
For those in business at least three years, and paying somewhere between $12,000 to perhaps $15,000. a year in premiu, you will obtain an experience modification. This definition is direct from the WCIRB website: California’s workers’ compensation experience rating system is a merit rating system intended to provide employers a direct financial incentive to reduce work-related accidents. The experience rating system objectively distributes the cost of workers’ compensation insurance more equitably among employers assigned to particular industry classifications.

The regulations governing the experience rating system are contained in the California Workers’ Compensation Experience Rating Plan. This plan is part of the California Code of Regulations and is approved by the Insurance Commissioner. Not all employers are eligible for experience rating. See Determining Eligibility.

Experience rating begins with a projection of the future cost of benefits that must be paid by an insurer based on a company’s history of payroll and claims (collectively referred to as “experience”). The WCIRB compares the experience of one company to the experience of other companies within the same classification. This comparison results in an experience modification.

Experience modifications, which are expressed as a percentage, compare the loss or claims history of one company to all other companies in the same industry. Generally, an experience modification of less than 100% reflects a better-than-average experience, while an experience modification of more than 100% reflects a worse-than-average experience. Accordingly, an experience modification that is greater than 100% usually increases the cost of your workers’ compensation premiums, while an experience modification that is less than 100% usually decreases the cost of your workers’ compensation premiums.

For those employers who qualify, experience rating is mandatory. Today, more than 120,000 California employers are experience rated, representing approximately 80% of all the workers’ compensation insurance premiums paid. Using information submitted by insurers, the WCIRB calculates and publishes experience modifications for each qualified employer. Regardless of which insurer provides you with your workers’ compensation insurance policy, if you are experience rated, your experience modification must be applied to your policy.

For those businesses which are “rated” you will generally fall into one of two categories: Those who need improvement, (a lower number), and those who are doing well and need to guard or maintain their current excellent rating. Whether you fall into the first or second category your agent should be well-versed in appropriate methods to improve or maintain your rating. For many businesses the rating is a blessing or a curse. This is the fertile ground you and your broker should be plowing to sow seeds and improve the future of your business. Thousands, tens of thousands, even hundreds of thousands of dollars are at stake each day and year are at stake for California businesses which are not paying attention to the underlying fundamentals.

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