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Are your employees classified correctly?

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Workers' Comp Codes and NCCI Classification

A class code is a three or four digit numerical code assigned by NCCI or a State Rating Bureau such as California’s WCIRB. Class codes are assigned to differentiate between the various job duties or scope of work performed by employees. NCCI’s classification system contains nearly 800 unique class codes and is the basis for both pricing and underwriting workers’ compensation insurance rates. NCCI is the abbreviation for the National Council on Compensation Insurance. They provide statistical data to insurance companies and states.

Workers' Comp Codes Affect Rates and Pricing

One of the primary means of pricing workers’ compensation insurance is classifying a risk, or workplace exposure, within the proper NCCI workers’ compensation class code. Incorrect risk classifications by insurance agents or underwriters will result in an inaccurate premium. Payroll may be reclassified and moved to the correct class code at the time of audit. This could result in a policy credit or debit. A workers’ compensation audit is the process to make sure payroll was appropriately estimated and employees were correctly classified.

What is NCCI?

In most states, the workers compensation classification system used is maintained by NCCI, the National Council on Compensation Insurance. NCCI is an independent advisory organization largely funded by the insurance companies. Both insurance companies and states utilize NCCI’s statistical data for rating and pricing coverage. NCCI’s function is to develop and provide the statistical data used to set manual rates for workers compensation insurance. This process is done, individually, for each state that utilizes NCCI. These manual rates are used for pricing and to assign each employers’ annual Experience Modification Rate, These NCCI worksheets, or Experience Modification Ratings are developed based on a ratio of claims frequency and cost of premium paid.
NCCI was found in 1923. They help cultivate a healthy workers compensation system. Their objective data and trend analysis promotes competition between insurance companies. Their data is also used by states and insurance companies to set rates for each class code based on prior underwriting profitability or losses.

Your State & Class Codes

Insurance companies file their “base manual rates” for approval with each state for all class codes. Rate recommendations are generally made to the state and carriers annually by the National Council on Compensation Insurance.

Prior Experience & Coverage

Insurance company underwriters are permitted to make premium rate adjustments based on unique factors about your business, safety practices, and management experience in most states.

Your Claims or Losses

Employee claims are reported to NCCI and statistically compared with all other similar type businesses using the same class code in each state. An Experience Modification Rate may apply to your business after a few years of coverage.

Policy Credits and Debits

Insurance companies may apply policy credits and debits to the base manual rates. Additional discounts can be applied to premium as the total payroll & premium increases.

Workers’ compensation insurance for sole proprietors & Independent Contractors

Many sole proprietors and independent contractors are not required to purchase workers’ compensation insurance, but it may be beneficial to do so. When you’re a sole proprietor and all the decisions fall on your shoulders, inevitably important business questions arise, such as: Does a sole proprietor need workers’ compensation coverage?

Workers’ compensation is required in most states for businesses with employees. If an employee is injured on the job, the injured employee can receive reimbursement for lost wages and medical care.

A sole proprietorship with no employees typically is not required to purchase workers’ comp. However, if you’re injured on the job, a workers’ compensation policy can help pay for medical bills and replacement wages while you recover. Since your health insurance provider might deny a claim for a work-related injury, having workers’ comp could be essential.

Some businesses may contractually require sole proprietors to buy worker’s comp insurance for themselves, especially if they work in fields that are noted for work-related injuries, such as roofing and construction.

If you have a sole proprietorship with no employees, there are several considerations before deciding whether or not to purchase workers’ comp insurance, such as the workers’ comp laws in your state.

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