Workers’ Compensation Insurance – What Employers Should Know

All U.S. employers, with very limited exceptions, are required to purchase Workers’ Compensation insurance. This state-regulated insurance provides state mandated medical and lost wage benefits to employees injured during the course and scope of their employment. Exceptions to purchasing this mandatory insurance include very small companies that do not meet the number of employees requirement, or in some cases, very large companies that prefer to self-insure this risk. An employer’s failure to comply with a state’s requirements will trigger economic penalties and possible criminal prosecution. A variety of Workers’ Compensation insurance programs are available from the employer’s risk finance perspective.

Exclusive Remedy & Employers’ Liability

Although each state’s regulations differ, they all share a common purpose. They provide an “exclusive remedy” in the form of a “no-fault” program for compensating employees in the form of medical benefits and lost wages in connection with injuries that arise in the course and scope of their employment. While Workers’ Compensation insurance responds to the “no-fault” consequences of workplace injury, Employers’ Liability insurance, which is typically joined with Workers’ Compensation policies, provides coverage for common law claims against the employer by the employee, their family or third-parties, if the claimant or plaintiff can meet the legal standard in their jurisdiction for establishing that the injury was caused by the employer’s negligence, gross negligence, recklessness or willful conduct.

The Broad Landscape of Special Funds and State Programs

Many states provide special funds to pay workers’ compensation benefits to injured workers employed by companies that failed to purchase insurance. Assigned risk pools or insurers of last resort are also available for employers that commercial insurers consider too risky.

Monopolistic States

There are currently four monopolistic states: Ohio, North Dakota, Washington and Wyoming. Puerto Rico and the U.S. Virgin Islands also operate under a monopolistic structure. These states legislated requirements that Workers’ Compensation insurance be provided exclusively by the state’s compulsory program. Commercial insurers may not offer Workers’ Compensation insurance in those four states, yet at least two of the states do allow limited opportunity for self-insurance for well-capitalized employers.

Competitive State Funds

In contrast to monopolistic state programs, Competitive State Funds are state-owned and operated insurance facilities that compete in the open market with commercial insurers to underwrite Workers’ Compensation insurance solely within their respective state.

Arizona, California, Colorado, Hawaii, Idaho, Kentucky, Louisiana, Maine, Maryland, Minnesota, Missouri, Montana, New Mexico, New York, Oklahoma, Oregon, Pennsylvania, Rhode Island, Texas, Utah, and West Virginia operate Competitive State Fund programs.

Second or Subsequent Injury Funds

In most states it’s illegal for an employer to refuse to hire a prospective employee or terminate an employee if they have previously filed a workers’ compensation claim. To reduce the possibility of this form of discrimination, some states established a Second Injury or Subsequent Injury Fund. The purpose of these funds is to limit an employer’s (and their Workers’ Compensation insurer’s) exposure by reimbursing or covering the Workers’ Compensation benefits paid because of an aggravation or recurrence of a previously existing injury. Reimbursement eligibility requires that the injury must result from a qualifying permanent partial pre-existing disability, illness or congenital medical condition that may hinder person from obtaining employment.

Insurance Premium Calculation – The Loss Experience Mod Factor

This is a complex and often misunderstood concept that has a major effect upon a company’s Workers’ Compensation insurance premiums. On a general level, it is essentially a comparative analysis of your company’s Workers’ Compensation loss history for the prior three years against companies within the same or similar industries.

The standard Experience Mod, which is explained below, is calculated by the National Council on Compensation Insurance (NCCI). Employees are classified by standard identification codes depending upon their occupation. Depending upon an employer’s size and diversity of operations, many classification codes may be involved in the analysis.

Simply stated, the neutral point in the rating curve is 1.0. If a company’s Experience Modification Factor (“Mod”) is greater than 1.0, the employer is issued a “Debit Mod” meaning the premium will be increased by a certain mathematical factor. Alternatively, if the loss history is better than expected or lower than 1.0, the employer receives a “Credit Mod” factor that will decrease the Workers’ Compensation premium.

A Premium Calculation Illustration Using a simple example, suppose the employer only has one classification code for all employees, all of whom work in the same state, and the Workers’ Compensation expected loss rate or base premium rate (as established by the state in which the company’s employees are located) is $3 for every $100 of payroll.

If the employer has a Mod factor of 0.70, the premium will be calculated as 0.70 x $3 = $2.10. This means the employer is paying $2.10 per $100 of payroll, while its competitor peer group, on average, is paying $3 per $100 of payroll.

Assume the annual payroll for this employer is $2 million, the result is the employer would pay $42,000 in premium versus its competitors with a Mod of 1.0 paying $60,000 for the same coverage. Conversely, if the employer in this example had a Mod of 1.5, the premium would be 1.5 x $3= $4.5 per $100 of payroll. Using the same $2 million annual payroll, the employer in this case would pay $90,000 in annual premium while competitors with a 1.0 Mod would be paying $30,000 less for the same coverage. It’s easy to appreciate how these Credit or Debit Mods will have a significant impact upon a company’s bottom line, particularly as annual payrolls reach significant levels.

Many factors go into the actual calculation of a Mod including the company’s loss frequency (number of losses), loss severity (the cost of the losses), and an estimate of losses that are characterized as Incurred But Not Reported (IBNR), meaning expected losses that have not yet materialized into actual workers’ compensation claims.

Medical-Only vs. Lost-Time Claims

When calculating an experience Mod, Medical-Only claim reserves are generally factored at about 30% of ultimate value. Lost Time or Indemnity claims are treated very differently. The literature on calculating experience modification factors states that the first $5,000 of a Lost Time claim ultimate reserve is factored in at 100% with discounts applying above $5,000, including a catastrophic claim cap limit. Therefore, the frequency of Lost Time claims is a real driver of adverse experience. If a company has one Lost Time claim valued at $50,000, it will have less of an adverse affect upon the Mod factor than twenty Lost Time claims valued at $2,500 per claim.

The difference between how these two types of claims affect the Mod should be a strong incentive for employers to implement modified duty programs, with particular attention given to getting employees back to work during the mandatory benefit waiting period, whenever possible. This will cause the claim to be reclassified to “Medical Only” thereby reducing the multi-year adverse impact upon the company’s Workers’ Compensation insurance premiums.

Claim reserve management is critically important as having over-reserved claims will exponentially affect your Mod factor and correspondingly increase your premium. Having under-reserved claims is also no benefit, as the insurer’s audit may result in an unexpected assessment and, of course, increased premiums going forward. Periodic reserve evaluation by a qualified professional should ensure that over-reserved cases are negotiated downward to a reasonable level and under-reserved cases are reserved properly.

Loss Prevention

Loss Prevention is the best way to keep insurance premiums in check. The process can take many forms but essentially involves identifying potential areas of work injury risk and applying techniques to eliminate or substantially reduce the risk that an injury will occur.

Identification of potential causes of risk through performance of a workplace risk assessment is the first step. This process includes critical analysis of procedures as well as physical inspection of facilities and work environments, and discussions with operational personnel and key managers.

Once the causes of potential loss have been identified, modifications can be implemented to operational and business practices in order to reduce the associated risks. The assessment process should be performed by qualified consultants, combining qualitative elements and quantitative metrics including specifications of the physical requirements of each function and the associated loss costs.

Findings should be reviewed with key stakeholders. After agreed upon modifications to operational programs and/or safety programs have been implemented, it’s important to monitor results and make adjustments to the preventive measures. Periodic re-testing is important to ensure optimal results are consistently achieved as the company develops. This process has unique relevance in an acquisition scenario.

Loss Control

Loss Control is the process of reducing or mitigating the effect of losses once they occur. Similar to loss prevention safety programs, loss control should encompass well-formulated procedures to respond to various loss situations. The most common examples of loss control are obtaining immediate medical attention for injured workers and having a limited duty return to work program. Employers should conduct a post-loss analysis of the factors that precipitated the loss to determine whether modifications to the loss prevention plan are appropriate. Any post-loss control program should include a process for coordinating medical care to ensure that appropriate medical treatment is received timely so as not to exacerbate a condition while managing medical costs to avoid any unnecessary expenses. Additionally, developing a close working relationship with insurers to deal with potentially fraudulent claims, and implementing an early return to work or modified return to work program all factor into keeping losses at their lowest possible level.

OSHA Focuses On Ergonomics

The Occupational Safety & Health Administration (“OSHA”) publishes a variety of guidelines on the topic of workplace ergonomics for various industries and jobs. OSHA has announced plans to heighten its enforcement of ergonomics under the General Duty Clause which requires employers to “…keep their workplaces free from recognized serious hazards, including ergonomic hazards.”

OSHA Enforcement has stated:

Even if there are no guidelines specific to your industry, as an employer you still have an obligation under the General Duty Clause, Section 5(a)(1) to keep your workplace free from recognized serious hazards, including ergonomic hazards. OSHA will cite employers for ergonomic hazards under the General Duty Clause or issue ergonomic hazard letters where appropriate as part of its overall enforcement program. OSHA encourages employers, where necessary, to implement effective programs or other measures to reduce ergonomic hazards and associated musculo-skeletal disorders (“MSDs”). A great deal of information is currently available from OSHA, NIOSH, and various industry and labor organizations on how to establish an effective ergonomics program, and OSHA urges employers to avail themselves of these resources.
Workers’ Compensation costs have a direct bottom line effect upon all enterprises. Managing those costs to the optimally lowest level requires operational risk assessment, planning, education, an effective return to work program, continual evaluation and active management of loss reserves and third party claims administrators. Experienced insurance professionals are an employer’s best resource for minimizing the adverse effects of work-related injuries upon profitability.

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Frequently Asked Questions About Michigan’s Workers’ Compensation Laws

Question: The injury that occurred was my employer’s fault. Can I sue my employer for my pain and suffering?

Answer: Generally, Michigan law prohibits employees from suing their employers for damages, beyond the economic benefits provided by workers’ compensation. However, you may be able to take legal action against the manufacturer of a defective product or against an individual (other than a co-worker) who caused the injury. If you have questions about your potential legal claims, you should talk with a Michigan workers’ compensation lawyer.

Question: I believe that my injury resulted from a violation of my civil rights. Can I sue my employer in this situation?

Answer: Perhaps you can. In the workers’ compensation law, there are exceptions to the general rule that prevent an individual from seeking non-economic damages from an employer. One exception is a civil rights violation; another is an injury that directly results from an intentional act by the employer. If you feel that one of these exceptions applies to you, talk with a Michigan workers’ compensation lawyer about your potential legal claims.

Question: I was injured while on my way into work. Am I eligible for workers’ compensation benefits?

Answer: Workers’ compensation usually does not apply to one who is traveling to and from the place of employment. However, once a worker is on the employer’s property, workers’ compensation insurance may cover an injury.

It is important to note that employees who must travel to perform work assignments are covered by workers’ compensation benefits if they are hurt on the job. For example, a person who is injured after leaving the worksite to make a delivery or attend a meeting at another location may qualify for workers’ compensation, because the trip was an essential part of his or her job assignment.

On the other hand, workers’ compensation may not cover an injury, if the employee was hurt while making a side-trip to handle purely personal business. If you have questions about coverage in this situation, talk with a Michigan workers’ compensation lawyer.

Question: My co-worker and I were goofing around when I was injured. Am I still entitled to make a claim for workers’ compensation benefits?

Answer: Michigan courts traditionally recognize that employees may engage in a certain amount of “horseplay.” In most cases, this would still qualify an individual for workers’ compensation benefits. However, each case must be evaluated separately, based on the specific circumstances. A worker who engaged in serious willful or intentional misconduct may lose the right to workers compensation benefits.

Question: My employer offered me a different type of job, but I feel that it is beneath my previous pre-injury position. Do I have to accept the position?

Answer: Michigan workers’ compensation law requires injured employees to accept a position offered by their own employers (or other employment sources), if the new job is within their qualifications and training, and any medical restrictions. When the new job pays less than the previous position, the worker should receive partial wage loss benefits, to cover part of the difference between the individual’s previous and current earnings.

A worker seriously risks any claim for continued workers’ compensation benefits by turning down the offer of a job that he or she is able to do. If you are not sure how to handle a job offer or your employer demands that you actively look for other work, consult an attorney immediately.

Question: What happens if I try to return to work in a job that is supposed to be within my medical restrictions, but cannot perform the job duties?

Answer: Under the law, it should be possible for you to resume receiving benefits. However, your employer may challenge whether you made a real effort to return to work. If this happens, and you truly are unable to work, you should talk with a Michigan workers’ compensation lawyer immediately.

Question: Can I choose my own doctor when I am getting treatment for my work-related injury?

Answer: For the first 10 days after a work-related injury, the employer has the right to choose the treating doctor. However, after 10 days, the law allows you to select your own doctor and other medical care providers, as long as you select qualified medical professionals and notify your employer of your intentions.

If you or a loved one has suffered a workplace injury, it is important to talk with a Michigan workers’ compensation lawyer with experience in Michigan worker’s compensation law.

Attorney Marya Sieminski joined the Law Offices of Sam Bernstein in 2003. She is admitted to practice law in Michigan state courts and in the U.S. District Court for the Eastern District of Michigan. She earned her Bachelor of Science degree at the Massachusetts Institute of Technology and graduated magna cum laude from Wayne State University Law School. Marya has worked as a trial lawyer for 10 years and exclusively represented victims in personal injury litigation and in workers compensation claims. She also was appointed by the Governor to serve on the State of Michigan Workers Compensation Qualifications Advisory Committee.

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