Upon completion of this section, you should be able to:
1. Describe the development of the Workers’ Compensation benefit system.
2. Identify the basic objectives of the Workers’ Compensation Law.
3. Identify the two types of Workers’ Compensation Law.
4. Describe the purpose of the "Information Page" and identify each of its components.
5. Describe the General Section and the Six Parts of the policy and the purpose of each.
6. Identify and explain the provisions of the policy, especially the "Audit" clause.
The first Workers’ Compensation Laws in the United States were enacted in 1911. They represent evolutions of English common law, which progressed to employers’ liability statutes and finally to the Workers’ Compensation Laws we know today.
The English common law principle held that employers were responsible for the injury or death of employees resulting from a negligent act by the employer. The burden of proof, however, was on the employee who had to bring suit and establish that the employer was at fault for the injury.
Employers had three strong common law defenses against employee claims: contributory negligence (the employee contributed to the accident), assumption of risk (the employee assumed the risk of injury in accepting employment involving a known hazard), and negligent acts of fellow workers (that fellow workers rather than the employer were responsible for the injury). As business enterprise and machine production expanded, the number of suits increased. It was a slow, costly and uncertain legal process for the disabled worker to prove that the injury was due to the employers’ negligence. A more equitable means of providing for workers’ injuries was needed.
Between 1900 and 1910, a number of states adopted Employers’ Liability Acts. The position of the employee was greatly improved; nevertheless, the acts were far from satisfactory. The employee still had to prove employer responsibility and negligence.
States began to investigate the possibility of enacting Workers’ Compensation laws. The first modern compensation system had been adopted in Germany in 1884. In 1911, Wisconsin was the first state to enact a Workers’ Compensation law that was declared constitutional.
Today, all 50 states have Workers’ Compensation laws. In addition to these state laws, Federal Workers’ Compensation laws have been enacted. These include the District of Columbia Workmen’s Compensation Act, the Federal Employers’ Liability Act (FELA) and the U.S. Longshore and Harbor Workers’ Compensation Act (USL&HW).
Workers’ Compensation laws are designed to provide a satisfactory means of handling occupational disabilities. The theory behind the laws completely disregards the old idea of liability based on negligence. It is based on the idea that employers should assume the costs of work-related injuries and diseases, without regard to fault, and pass these costs on to the consumer as a part of the cost of production.
The following basic objectives underline Workers’ Compensation laws:
TYPE OF LAW
Compensation laws are compulsory or elective.
A compulsory law requires each employer within its scope to accept its provisions and provide for benefits specified. Most states are compulsory law states. Exceptions are: New Jersey, South Carolina, and Texas.
Under the elective law, the employer may accept or reject the act. If the employer rejects the act they lose the three common-law defenses.
In most jurisdictions, employers are required to obtain insurance or provide evidence of a financial ability to carry their own risk.
Thirteen states permit employers to purchase insurance either from a competitive state fund or from a private insurance company. Four states and all Canadian provinces require employers to insure in a monopolistic state fund. The monopolistic states are North Dakota, Ohio, Washington, and Wyoming.
Self-insurance is permitted in 47 states, including some of the monopolistic states. Large corporations may prefer to self-insure to avoid administrative costs associated with insurance policies. They assume liability for Workers’ Compensation, which may be financed through a reserve fund or captive insurer, to pay compensation and other benefits under the Workers’ Compensation acts of the states. Self-insurance operates best when an employer has a spread of risks so large that it may benefit from the law of large numbers.
A basic objective of Workers’ Compensation is that coverage should be universal. However, due to historical, political, economic, or administrative reasons, no state law covers all forms of employment. Virtually all industrial employment is covered. Some states cover all private employments. Other states exempt firms with less than a stipulated number of employees; this is referred to as numerical exceptions. Most states specifically exclude certain employments. Agricultural workers, domestics and casual labor are usually exempted. However, many states allow an exempted class to be brought in voluntarily by the employer or by an administrative order. Minors are covered in all states. Most states cover all public employments.
Because the laws vary considerably from state to state and are amended frequently, it is important that you have access to current laws of your particular state(s).
A good source of information is the "Analysis of Workers’ Compensation Laws." This booklet is published every March by the U.S. Chamber of Commerce. It provides information and charts on coverages, benefits provided and the administration of laws. The publication can be ordered from Domestic Policy Publications, U.S. Chamber of Commerce, 1615 H Street, NW, Washington, DC. 20062-2000 or by calling 1-800-638-6582; 1-800-352-1450 in Maryland.
The benefits payable to injured employees attempt to cover most of the employees’ economic loss, including loss of earnings and extra expenses associated with the injury. The three types of benefits provided are:
1. Cash benefits - include impairment and disability benefits.
2. Medical benefits - provided without dollar or time limits.
3. Rehabilitation benefits - include medical and vocational rehabilitation.
In most states, the state average weekly wage is used to determine benefits. The maximum weekly benefit generally equals or exceeds 66 2/3% of the statewide average weekly wage. In over half of the states, the benefit is 100% or more. Many provide for automatic adjustment of maximum benefits on an annual basis.
SECOND INJURY FUND
Second injury funds are usually established by statute to (1) encourage hiring of the physically handicapped, and (2) more equitably allocate costs of providing benefits to these employees. The funds provide payments when a pre-existing injury combines with a second to produce disability greater than that caused by the second injury alone.
NATIONAL COUNCIL ON COMPENSATION INSURANCE
The National Council on Compensation Insurance, headquartered in Boca Raton, Florida, is a voluntary, non-profit, statistical, research and ratemaking organization. NCCI’s primary functions are the preparation and administration of rates, rating plans, loss costs, and systems for Workers’ Compensation insurance in 33 states and the provision of similar assistance in about one-half of the remaining states. Members of NCCI include stock companies, mutual companies, competitive state funds and reciprocals. Member companies provide NCCI with extensive information. This information is used to scientifically calculate rates which are published by the Council’s Basic Manual.
The NCCI Basic Manual for Workers’ Compensation and Employers Liability Insurance is standard with insurance companies. It sets forth the Council’s rules, procedures, rates, and loss costs for Workers’ Compensation. All states now provide for rate regulation by state authority. Revised rates and deviations from the Council’s rules or procedures are filed by the states.
Deviations may also be filed by individual companies in some states. As set forth in the Council’s Manual, rates are generally based on total remuneration, or payroll. Policies are usually written on an estimated payroll basis for which an estimated premium is collected. At policy expiration (in most cases), a premium audit is required to determine the actual payroll exposure during the policy period. Actual premium can then be determined and any necessary adjustments made.
Several states have independent rating bureaus. Some use the services of the National Council while others make their own rates and issue their own rules and manuals. Jurisdictions where the NCCI Basic manual does not apply are: California, Delaware, Massachusetts, Michigan, New Jersey, New York, Pennsylvania, Texas as well as monopolistic states of North Dakota, Ohio, Washington, Wyoming.
COMPETITIVE RATING & ADMINISTERED PRICING JURISDICTIONS
Thirty-three states now allow for open competition. In these competitive rating jurisdictions, carriers can file their own manuals and rates. In these states, NCCI promulgates loss cost factors which are filed for approval by the state’s insurance department. Upon approval, companies then file rates that are based on the approved loss cost filing. These company filings do not necessarily have the same effective date as the "Advisory" filing of NCCI; therefore, company auditors must be aware of the effective date. States that do not allow competitive rating include: Arizona, Florida, Idaho, Iowa, and Wisconsin; these states are known as Administered Pricing Jurisdictions. Consult the preface in the NCCI Basic Manual for current status by jurisdiction.
THE WORKERS’ COMPENSATION POLICY
The present Workers’ Compensation and Employers’ Liability policy was revised by the National Council on Compensation Insurance (NCCI) to replace the 1984 policy and became effective in most states on July 1, 1992. NCCI serves as the filing agency for insurers in most states and the standard form and endorsements adopted by NCCI are made mandatory in those states. The primary reasons for this revision were to reduce the paperwork associated with the writing of the policy and to make the policy more readily understood. The most significant changes include:
A clarification that the policy was designed to provide coverage under the state Workers’ Compensation acts, and premium is determined on that basis. The policy is not intending to provide coverage for federal Workers’ Compensation laws or specific federal acts. Insureds who wish to purchase coverage under a federal law or act may continue to do so by means of a coverage endorsement.
In this same light, the policy clearly provides for the exclusion of Employers’ Liability coverage with respect to the same federal laws or acts.
An amendment and exclusion to Part Three - Other States Insurance section that clarifies the applicability of this section and strengthens the notification provision so the insurer can accurately determine the extent of coverage. An in-depth discussion of this section is provided later in this material.
The Rules section of the Basic Manual for Workers’ Compensation and Employers’ Liability Insurance correlates to provisions contained in the policy and endorsement forms. The manual is made a part of the policy in Part Five - Premium under "Our Manuals."
An analysis of the various sections of the Workers’ Compensation policy follows.
Information Page is divided into four major parts or items.
Item (1) - Provides identifying information about the insured: insured’s name, mailing address, type of entity, workplaces and policy number. While it is proper to use a post office box address, information regarding the physical address of the insured is extremely helpful to the claims, loss control and premium audit departments of your company.
Item (2) - Shows the period of coverage. Coverage begins at 12:01 a.m. at the address of the insured given in Item 1 of the Information Page. Since this time period is standard within the industry, there should be little doubt as to which policy covers should a claim arise at a time when the insured is changing carriers.
Item (3) - A. Identifies the state or states in which coverage will be provided. Benefits that are required to be paid will be subject to the state act(s) identified in this section. This section should list all states where the insured is operating and where the insured is licensed to write coverage. B. Provides the limits of liability for Employers’ Liability. C. Benefits are payable according to the state act requirements for those states listed in Item 3.A. To provide coverage for incidental exposures in other states, those states should be listed in Item 3.C. If the state is not listed, no protection is provided for incidental exposures in that state. The listing should not include the states listed in 3.A, the monopolistic fund states or those states where the insurer will not provide coverage. D. Provides for the listing of endorsements or schedules attached.
Item (4) - Provides the information necessary to calculate the premium: classification phraseology and code number, exposure estimate, rate and estimated premium.
Standard Policy Form includes a general section and six parts.
General Section - Explains the nature of the policy and defines important terms. Most importantly, this section specifically states that the policy is a contract and further defines the parties involved in this contract. It further defines the applicability of the contract to the state Workers’ Compensation acts of the states listed in Item 3.A.
Part One - Workers’ Compensation Insurance. This section obligates the insurer to pay the benefits required of an insured under the state Workers’ Compensation laws. This obligation extends to all operations of an insured within the states specifically listed in Item 3.A of the Information Page unless the operations or locations have been excluded by endorsement. This coverage is automatic, therefore, operations or locations not listed on the Information Page, operations or locations unknown to insurer at the inception of the policy and/or operations not anticipated at the inception of the policy are covered by the policy if within the state(s) jurisdiction(s) listed.
Part Two - Employers’ Liability Insurance. This section is similar to Part One - Workers’ Compensation except that it relates to the coverages, conditions and exclusions for Employers’ Liability. Though coverage under Part One is extensive, certain employees may not be covered under the Workers’ Compensation law. Casual labor employees, for example, are generally excluded from the act in most states. These persons may hold the insured responsible for work-related injuries, however. Employers’ Liability provides legal liability protection for suits alleging employer negligence.
Part Three - Other States Insurance. This part explains how the policy would respond to claims in states other than the listed workplace. As was previously mentioned, this coverage is designed to provide for incidental exposures in those states listed in Item 3.C. The 1992 policy revisions to this section stress the notification requirements to the insurer.
Historically, insureds and agents relied on the Other States coverage to provide for new operations in states not listed in Item 3.A. Though the 1984 policy required that notification be given to the insurer when such new operations existed, this was rarely done. The amendment to Part 3, Section A.2 provides, "If you begin work in any one of those states after the effective date of this policy and are not insured or self-insured for such work, all provisions of the policy will apply as though that state were listed in Item 3.A of the Information Page." The emphasized wording to this section clarifies that all notification and other provisions of the policy apply to the Other States coverage, as well.
With the 1992 policy revision, Part 3, Section A.4 was added. This section provides, "If you have work on the effective date of this policy in any state not listed in Item 3.A of the Information Page, coverage will not be afforded for that state unless we are notified within 30 days." This added section is critical for the underwriter and the agent. It strengthens the importance of the notification requirement and emphasizes that the insurer needs to accurately determine the exposures covered under the policy.
This provision is extremely important for construction, erection, installation or servicing operations when the policy is being renewed or replaced. An insured and agent who relied on the Other States coverage for new operations in a state listed in Item 3.C may find no coverage on the new or replacement policy. Work started in a state during the present policy is not a new operation for the subsequent renewal. Agents and brokers should be instructed to tell their insureds of this notification requirement.
Part Four - Your Duties If Injury Occurs. This section establishes the requirements for notification and assistance by the insured in the event of an injury.
Part Five - Premium. This section contains provisions for the development of the premium. A. This section makes the Manual or rating plans of your company a part of the premium development. B. Explains that classifications determined at the inception of the policy will be used in the development of the premium. These classifications were assigned based on an estimate of the exposures at the inception of the policy and the actual exposures, if different, can be added by endorsement to the policy. C. Defines the basis of premium. This section also establishes a means for determining the premium basis for subcontractors and others that can make the insured legally liable for coverage. E. Establishes that the premiums used at inception are estimates and that the final premium will be determined at audit. It also establishes that the classifications could change if they do not reflect the actual exposures insured by the policy. This section establishes a means of premium determination in the event of a cancellation. G. Gives the insurer the right to audit the records of the insured. Note that other than actual payroll records may be used.
It is important to note that most state Workers’ Compensation acts now contain provisions that limit classification changes. Unless the insured is engaged in a business operation where the exposures may differ throughout a policy period, such as in construction or erection work, the classifications shown on the policy at inception will apply unless changed within a mandated period of time, generally 60 - 90 days.
If the actual operating exposures are determined after this mandated time period, change is allowed but only from the date; changes to the classifications are not allowed back to the inception of the policy. If the actual exposures are determined in the last 90 days (this may be different depending on the state), no change in classification can be made until the renewal of the policy. It is incumbent on the underwriter to establish the proper classifications at the inception of the policy. This rule does not apply if new operations are added during the policy period or if misrepresentation occurs on the application.
Part Six - Conditions. This part further limits or defines the rights and obligations of the parties. Condition A represents an important condition for the underwriter. Inspections made by insurance company personnel, or others representing the insurer, are solely for the determination of insurability. These inspections do not warrant a safe workplace nor are they intended to represent that the insured has complied with the laws for safe workplaces, such as OSHA.
In spite of the flexibility of the standard policy, the provisions of the policy may be modified through the use of various endorsements. Generally, these endorsements accomplish two things: (1) they increase the coverage exposure, as when a sole proprietor elects to be covered by the policy, or (2) they limit the exposure, as when certain workplaces are excluded from coverage.
Endorsements may be attached to the policy at its inception or the policy may be endorsed mid-term as the need arises. Such an endorsement might be used if the insured started a new operation during the policy period.
Endorsements generally accomplish one or two purposes: to extend or limit the coverage provided, or to incorporate special provisions that may affect the premium determination. Endorsements may be attached when the policy is first issued, or may be added at any time during the policy period. When endorsements are added during the policy period, the Auditor must take care to note the change in coverage or premium determination and audit accordingly. Some endorsement changes require a segregation of the premium basis for the periods before and after the effective date of the change.
Each endorsement has Notes that give instructions for use. They also indicate the particular Manual Rule that controls the endorsement, and a description of any law cited by the endorsement. Be sure to read the Notes for each endorsement.
The forms covered in this section have been developed by the National Council on Compensation Insurance to be used with the 1992 NCCI policy. Not all endorsements are included. Refer to the NCCI Forms Manual for examples of all Standard and Advisory Endorsement forms.
The Auditor should always be alert for exposures that require an endorsement and alert the underwriting department if one is not attached to the policy.
Aircraft Premium Endorsement
This endorsement is used in conjunction with classification code 7421 which applies to an insured who owns or leases aircraft that is used for the transportation of personnel in the conduct of the employer’s business. It applies in any state that requires an additional premium charge for aircraft. The state rate pages indicate if the additional charge is applicable. The charge is per passenger seat. Passenger seats are counted on the number available for use, not on those actually used.
One aircraft may be substituted for another on the Schedule without an additional charge if the number of passenger seats are the same. However, if an aircraft is sold and not replaced, or one with more seats is substituted, the additional charge is required.
If a replacement aircraft is purchased prior to the sale of a scheduled aircraft, an overlap of even one day requires full charge for both aircraft:
3 passenger seat airplane on schedule -- acquired 4 passenger seat airplane on 7/1 -- sold 3 passenger seat airplane on 7/3 --- Charge = 7 passenger seats.
Anniversary Rating Date Endorsement
In most cases, the anniversary rating date is the month and day that the first Workers’ Compensation policy for a given insured went into effect and it remains the same annual anniversary thereafter. However, there are circumstances which will change an anniversary rating date. A different date can only be established by the National Council or by the appropriate licensed rating authority.
For audit billing purposes, the periods before and after the anniversary rating date are treated as separate policy years. For the period up to the anniversary date, the rates in effect one year prior apply. From the anniversary rating date to expiration date, the rates which are in effect as of the anniversary rating date apply.
Policy written by one company: 6/1/99 to 6/1/00
Rates: Rates effective 10/1/98 (latest rates effective on or prior to inception date of policy). A rate change became effective on 10/1/99.
Rewritten by another company: 11/1/99 to 11/1/00
Rates Used: Rates effective 10/1/98 will be used from the inception date to the normal anniversary rating date, 6/1/99. On the anniversary rating date, the latest rates in effect on or prior to, the anniversary rating date will be used. With a rate change effective 10/1/99, those rates would be used on and after the anniversary rating date.
No policy may be cancelled, rewritten or extended for any period to avoid to take advantage of any changes in the rule or rates of the manual.
Designated Workplaces Exclusion Endorsement
This endorsement acts to exclude coverage for operations at the place or places designated in the endorsement. It is necessary when the insured has purchased other coverage for a state, jobsite, plant, or operation; or, when the insured wishes to exclude an operation, and state law or regulation permit such an exclusion.
This endorsement is necessary because the other insurance provisions of the policy (Part One - E and Part Two - F) provide for contribution to a loss from all insurers or self-insurers, and do not exclude locations otherwise insured.
Employers’ Liability Coverage Endorsement
This is an Advisory endorsement.
The endorsement is used when Employers’ Liability is to be written without Workers’ Compensation. It provides Employers’ Liability in the designated states as though they were listed in Item 3A of the Information Page.
The endorsement may be used when an insured employer has operations in a monopolistic state fund - North Dakota, Ohio, Washington, West Virginia and Wyoming - which do not provide the employer with Employers’ Liability coverage. Private carriers are not allowed to write WC coverage in these states, but they may provide this Employers’ Liability coverage.
It may only be used in a National Council state when all employees are excluded from the Workers’ Compensation law, or when all employees have elected not to be subject to the Workers’ Compensation law, or when there is no state law or regulation making the use of the endorsement illegal.
Experience Rating Modification Factor Endorsement
This endorsement is designed to be attached to an experience rated policy issued before the modification was published. The endorsement merely states that the policy is subject to an experience modification; and that it will be endorsed on to the policy when it becomes available and any modification factor shown on the Information Page is an estimate.
Although the policy may be endorsed showing the modification, often a copy of the endorsement is not attached to the audit. Whenever this endorsement is attached and the modification is missing, refer to the Underwriter for the modification before processing the audit.
Longshore and Harbor Workers’ Compensation Act Coverage Endorsement
Longshore and Harbor Workers’ Compensation coverage may be provided only by attaching this endorsement to the Standard Policy as specified in Basic Manual Rule II.A.3. Coverage is provided only in states listed in the endorsement Schedule. The Act should not be designated in Item 3 of the Information Page. The endorsement excludes Defense Base Act, Nonappropriated Funds Instrumentalities Act and Outer Continental Shelf Lands Act coverages. They must be separately endorsed.
Included in the endorsement is the USL&HW coverage percentage with an explanation as to how the percentage can apply to work not normally subject to the USL&HW Act for non-F classifications. Inclusion of the percentage on the endorsement provides the basis for showing the percentage in the Rate Change Endorsement.
When the auditor discovers exposure under this Act, such as work performed at piers or ships berthed at piers, the payroll must be allocated and the appropriate loading applied to the Manual rate on the audit statement for this allocated payroll. Classifications followed by the letter "F" in the rate pages already contemplate this coverage and no allocation of payrolls is necessary.
Maritime Coverage Endorsement
Masters and members of the crews of vessels are not covered under state Workers’ Compensation laws or under the USL&HW Act. They are subject to admiralty law. It should be noted that the policy provides coverage under Part Two - Employers’ Liability. If this coverage is to be included, the Maritime Inclusion Endorsement must be attached.
Admiralty law coverage programs are described in Rule 3 of the Basic Manual. This endorsement is used to provide coverage for Program I and II (for Program II, the Voluntary Compensation Maritime Coverage Endorsement must also be attached). Coverage applies to the United States (including Alaska and Hawaii) and Canada, and while the vessel is sailing directly between ports in these areas.
This endorsement must describe the work to be covered. It may be described by location, size or name of vessel, or by other meaningful criteria. The endorsement excludes liability to provide transportation, wages, maintenance and cure, unless the endorsement schedule identifies that coverage is provided by showing an additional premium charge.
Sole Proprietors, Partners, Officers and Others Coverage Endorsement
This endorsement is used to provide coverage for the following:
1. For inclusion of executive officers in states where they are excluded from coverage but may elect to be covered.
2. For inclusion of a partner or sole proprietor in states where they may elect to be subject to the law (refer to Rule 2-E.3 in the Basic Manual).
3. The "Others" category is generally used to name principals, such as members of associations who normally do not have executive officer status and who, in the legal sense, are not considered as partners or sole proprietors. It might also apply to "husband and wife" in community property states. Note that this category is not used to name general groups of employees who might not otherwise be covered under the Workers’ Compensation law - this is the function of the voluntary compensation endorsement.
The endorsement clearly states the premium basis for the policy includes the remuneration of such persons and the notes clarify that the individuals so included may be listed by name or by describing them.
Voluntary Compensation and Employers’ Liability Coverage Endorsement
The Workers’ Compensation laws in most states do not cover all employees. Employees in certain occupations, such as farm workers, or employers with fewer than three employees may be exempt from the law.
Workers’ compensation benefits can be provided for these employees by voluntary action. This may be accomplished in two ways:
1. By complying with all the provisions of the Law (making necessary notification, filings, etc. when required) and adding the appropriate classification to the policy to bring the exempted employments within the terms of the Workers’ Compensation law. No further endorsement is required.
2. By use of the Voluntary Compensation and Employers’ Liability Endorsement, which adds an entirely different coverage to the policy.
This endorsement amends the policy to include an additional coverage called "Voluntary Compensation." The additional coverage does not make the employee subject to Workers’ Compensation law, but it does state that the insuring company will pay, on behalf of the insured, "an amount equal to the benefits that would be required of you if you and your employees described in Item 1 of the Schedule were subject to the Workers’ Compensation law shown in Item 1 of the Schedule." Refer to Rule 2-1 of the Basic Manual for rules and rates.
The insured must segregate the payroll of employees covered under the Voluntary Compensation Endorsement because the rates used may be different from those shown in the Manual. If a proper segregation of payroll cannot be obtained, the highest of the rates will apply to all payroll on the risk.
Labor Contractor Endorsement
The Labor Contractor may be indemnified for Workers’ Compensation and Employers’ Liability claims made by the leased workers of the client, by means of the Labor Contractor endorsement (WC 00 03 20 A) attached to the Client’s policy. The Labor Contractor is required to provide coverage for any direct employees and may be required to cover workers leased to others unless proof of each Client’s coverage is provided.
Employee Leasing Client Endorsement
The Employee Leasing Client Endorsement (WC 00 03 22) may be attached to a policy issued to a client when it is intended that coverage under the policy be limited to employees not leased from others.