Worker’s Compensation is a great example of a policy that requires more than looking at the bottom-line premium. The good news is that it doesn’t take a lot of education to know where to look for the important rating information. Here’s two situations that would be easy to detect and avoid if you know where to look. TRIGGER WARNING – there is math involved here but it’s all done for you.
The premium for Worker’s Compensation is derived by estimated payroll and the class codes used for the employees. It is easy to manipulate the payroll or use an incorrect class code to arrive at a lower premium. Let me give an example.
Here’s an auto service and repair shop with one carrier and a couple class codes. In this example we’ll have one of the service technicians also step into the office to take care of customers and answer the phone. In a case like this, the employee’s payroll should properly be allocated to the highest risk job performed, class code 8380. If this employee earns $50,000 per year then we would have $410,000 under 8380.
Class Code Classification Rate Payroll Premium
8742 Salespersons Or Collectors – Outside 0.28 $116,800 $327
8810 Clerical Office Employees NOC 0.15 $108,400 $163
8380 Automobile – Service or Repair Center & Drivers 2.73 $410,000 $11,193
Total Premium $11,683
Look what happens when this employee is incorrectly placed in the 8810 code? It reduces the payroll amount in 8380 to $360,000 and reduces the premium on the policy by $2587.
Class Code Classification Rate Payroll Premium
8742 Salespersons Or Collectors – Outside 0.28 $116,800 $327
8810 Clerical Office Employees NOC 0.15 $158,400 $237
8380 Automobile – Service or Repair Center & Drivers 2.73 $360,000 $8,532
Total Premium $9,096
The carrier will catch this in the audit. If a business moves carriers thinking they are getting a good deal, they will be in for a rude awakening when they are billed for the difference. A quick check of more than just the bottom line makes the difference obvious. So make sure the payroll you give your agent is correctly allocated on all the quotes you receive.
A second way that the total premium might not show the whole story is that every carrier charges a different rate per class code. This is especially important to watch if you shop prior to doing your audit. If your business has grown substantially then your current policy may not be accurate and a new company using those payroll numbers in their quote would not be a true comparison. See how these numbers could also lead to a business owner making the wrong decision if they don’t know what the rate per class code is?
In the first quote prior to factoring the company’s growth, the premium looks like a good deal.
Class Code Classification Rate Payroll Premium
8742 Salespersons Or Collectors – Outside 0.28 $116,800 $327
8810 Clerical Office Employees NOC 0.15 $108,400 $163
8380 Automobile – Service or Repair Center & Drivers 2.73 $410,000 $11,193
Total Premium $11,683
But the business owner received this renewal offer after the audit was complete and thought they should switch to the above.
Class Code Classification Rate Payroll Premium
8742 Salespersons Or Collectors – Outside 0.2 $150,000 $300
8810 Clerical Office Employees NOC 0.11 $185,000 $203
8380 Automobile – Service or Repair Center & Drivers 2.08 $600,000 $12,480
Total Premium $12,983
If we compare these two proposals by premium alone we would select the first option and switch carriers. However, the second one proves to be the better rate after audit when the estimated payroll is replaced with the actual payroll.
The lesson here is to always look at what goes into the final rate of Worker’s Compensation. It’s easy if you know what to look for. And Brukhouse Insurance is always here to answer any of your questions.
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