Workers’ Compensation Insurance: An Overview
Workers’ compensation coverage pays benefits to workers injured on the job, including medical care, part of lost wages and permanent disability. It also provides death benefits to dependents of employees killed from a work-related accident. Workers’ compensation systems are different in every state, as individual statutes and court decisions have shaped the way they handle claims, evaluate impairments, settle disputes, provide benefits and control costs.
Background of Workers’ Compensation Insurance
During the 19th century, the number of individuals joining the workforce grew exponentially. As a result, the number of workplace accidents grew as well. At that time, the only way that injured workers could obtain compensation for their injuries was to sue the employer. Many legislative proposals emerged early in the 20th century, focusing on compensating injured workers for their medical care and lost wages.
By 1949, all states had a system in place to provide compensation for injured employees.
Under these systems, the employer was responsible for providing compensation for the cost of medical care and wages lost, and consequently, the employee gave up his or her right to sue the employer for injuries. Currently, Texas is the only state where workers’ compensation is not mandated for all employers.
As part of the insurance package, the injured worker’s medical, rehabilitation and lost wages are paid for by the state or insurance carrier. If the injury leaves the employee disabled, the insurance carrier will pay the claim based on the extent of the injuries and based on its permanence. The disability will fall into one the following categories: temporary total, temporary partial, permanent partial or permanent total disability.
Workers’ compensation rates and programs are managed by private insurers, state funds or the National Council on Compensation Insurance (NCCI). [B_Officialname] can provide more information about how your state handles these programs
The Employer’s Responsibilities
Employers are required to do the following to comply with workers’ compensation insurance laws:
- Provide coverage for their employees and are held liable for all injuries suffered by employees while they are on the job (with the exception of employers residing in the state of Texas)
- Pay premiums and provide the carrier with audit payroll numbers
- Provide a safe environment
- Notify the carrier as soon as possible after an injury
- Investigate injuries
Managing Your Workers’ Compensation Costs
Your workers’ compensation insurance premium is based on a rating your company has, which is based on payroll, averages for your industry and claims experienced over a three-year period. Claims have a direct impact on this experience modification factor (mod), which can significantly drive up premiums. This means many times a company will pay for its own claims in increased premium costs. There are many things that companies can do to lower their workers’ compensation costs, such as the following:
- Inspecting your insurance policy to make sure that all job classifications and payrolls are correct.
- Making an investment in workplace safety to avoid accidents to improve claim histories and reduce overall costs. If you modify operating procedures even slightly, you can alleviate unnecessary exposure to injuries.
- Considering using a managed care organization that has a relationship with your insurance company. This will help you save on medical treatment costs.
- Creating a modified duty program at your organization to help injured employees return to work sooner. Under these programs, employees are assigned duties that they can physically complete while they recover. The most successful return to work programs incorporate speedy, quality medical care and assistance to reduce emotional stress after an accident.
There are other actions that your organization can take to reduce workers’ compensation costs, and we have the tools to show you how. Contact [B_Officialname] today to learn more.
Average Daily Wage (ADW)
Average daily earnings of an employee before an injury. Use to calculate benefits payments in situations where AWW would not provide an accurate reflection of actual wages.
Average Weekly Wage (AWW)
Average weekly earnings of an employee before an injury, which is used as a basis for determining weekly benefits payments.
Audited Premium
Final premium for the policy term based on actual payroll exposures.
Date of Injury (DOI)
Date when injury or illness occurred or, in the case of repetitive exposure injuries or illness, when it first became apparent that symptoms were work related.
Death Benefits
Benefits paid to surviving dependents when an employee dies as a result of injury or illness caused by their employment.
Excess Losses
In most NCCI and independent states, any dollars of each claim over x, where x is determined by the Primary/Excess Split Point that applies to the state and effective date. Excess losses are an indicator of loss severity.
Experience Modification Factor
An adjustment to the Manual Premium, calculated by an advisory organization (also known as rating bureaus), such as NCCI. It’s based on historic loss and payroll data of a particular insured. Also known as the experience modifier, experience modification rate, experience mod, ex-mod, EMR, EMF or simply the mod.
Independent Medical Examination (IME)
Requested by an employer or insurer to serve as an objective evaluation of an injured employee’s condition. IMEs are used in situation where the findings of an employee’s self-selected doctor need to be verified.
Light Duty
Temporary work restrictions placed on an injured employee by their physician that allows the employee to return to work while also allowing for their injury to heal properly.
Lump Sum Payment
The award of workers’ compensation benefits in one or more partial or total payments, instead of in weekly or biweekly payouts.
Manual Premium
Workers’ compensation premium prior to the application of the experience modification factor and any other credits and debits. It is calculated based on the employer’s payroll and the insurer’s premium rates by payroll code.
Maximum Medical Improvement (MMI)
Point in an injured employee’s treatment when recovery has reached a plateau with no reasonable expectation of continued improvement.
Modified Premium
Workers’ compensation premium after the application of an experience modification factor. Does not reflect any schedule credits or debits.
Occupational Disease
Illness or disease primarily caused by exposures faced by an employee in their work environment over the course of their employment.
Occupational Injury
Any injury, illness or death that results from a work-related event or from repetitive trauma or other repetitive acts required of an employee over the course of their employment.
Permanent Partial Disability (PPD)
Benefits paid to an employee who has suffered compensable work-related injury or illness to one or more parts of the body. Most states have a preset payment schedule (Schedule of Injuries) based on specific body parts or conditions.
Posting Notice
Certain states require employers to notify their employees of their workers’ compensation rights.
Permanent Total Disability (PTD)
Benefits paid to employees who face lifelong total disability from compensable work-related injury or illness.
Posting Notice
Certain states require employers to notify their employees of their workers’ compensation rights.
Primary/Excess Split Point
The dollar value at which an actual loss is split into primary and excess portions in the experience rating formula. The NCCI’s rating system uses a split point of $17,500. This means that the first $17,000 of every loss is considered a primary loss, and any amount over this point is considered an excess loss.
Primary Losses
In most NCCI and independent states, the first x dollars of each claim, where x is determined by the Primary/Excess Split Point that applies to the state and effective date. Primary losses are an indicator of loss frequency.
Premium Discount
A premium credit, based on the size of the premium that is paid.
Schedule of Injuries
List of payment amounts and maximum number of weeks PPD benefits are to be paid based on the part of the body that was injured.
Social Security Disability Benefits (SSDI)
Benefits paid to disabled individuals through the Social Security Administration, separate from workers’ compensation. Most state workers’ compensation statutes regulate whether an individual can receive both benefits at the same time. If both benefits are awarded, there are limits in place to ensure that an individual cannot receive more money than they are entitled to from either program independently.
Standard Premium
Premium after application of experience modification factor and schedule credits and/or debits, but before premium discount.
Statewide Average Weekly Wage (SAWW)
Average wages paid to workers in a set jurisdiction for a period of time, used to set the maximum and minimum for workers’ compensation benefits paid out to injured workers.
Temporary Partial Disability (TPD)
Benefits paid to an injured worker who is temporarily unable to fulfill the full requirements of their job but is able to perform at a reduced level. Benefits paid in such instances are based on possible pay differences between the regular and temporary position.
Temporary Total Disability (TTD)
Benefits paid to employees who are totally unable to work for a period of time but will make a full recovery. Though TTD payments stop when the employee is cleared to return to work, they may be eligible for TPD benefits if they still face some work restrictions.
Vocational Rehabilitation
Any of a number of services offered to injured employees to help them return to the workforce in a new occupation if they have suffered disabilities that will not allow them to return to their initial occupations.