Workers’ compensation insurance pays for occupational injury and illness; that’s why you buy the insurance. Oftentimes, it is an employer’s single most expensive line of coverage. What many contractors fail to grasp, however, is that some significant indirect costs are not covered by insurance. In addition, if your company is large enough to have an experience modification, every claim will affect your mod factor and directly impact your costs.
The direct costs of a workers’ compensation claim are fairly straightforward. Generally, they include the medical costs and any indemnity (wage replacement) payments. The insurance company will pay this dollar amount to resolve a claim, and this dollar amount will also factor into your experience modification.
Employers, however, also experience significant indirect costs. According to a study done by the Stanford University Department of Civil Engineering, these indirect costs often exceed the direct costs. For example, a fracture, on average, generates direct costs of $50,000. The indirect costs, however, are estimated at $55,000.
Indirect costs include, but are not limited to, the following:
- Any wages paid to the injured employee for absences not covered by workers’ compensation
- Wage costs related to time lost through work stoppage associated with the worker’s injury
- Overtime costs
- Time spent by administrators, supervisors, safety personnel and others who have to handle the claim
- Cost of hiring and training a replacement worker
- Lost productivity related to work rescheduling, new employee learning curves and accommodating the injured employee
- Cost to clean up, repair and replace equipment damaged by the accident
You might face other indirect costs as well, including OSHA fines, third-party liability costs, legal fees, worker’s pain and suffering costs and loss of goodwill.
You also must take into consideration the impact a claim will have on your experience modification and your insurance cost. Let’s assume, for example, that your base premium (before application of the mod and other credits) is $160,000, and you have not had any claims. You will have what is known as a claim-free experience modification. The claim-free rating is a company’s best possible experience modification for the year the rating is effective.
The actual claim-free rating is dependent upon the size of the business and variables such as expected loss rates as determined by the Workers’ Compensation Insurance Rating Bureau. In our example, the claim-free experience mod is 66 percent, which means your premium for your workers’ compensation policy will be $105,600.
However, this single claim, where the fracture with direct costs is $50,000, will drive your mod up 15 points. When this claim hits your mod, your premium will go up by $24,000 to $129,600. This claim will stay in your experience modification formula for three years. In other words, this $50,000 claim will end up costing you $72,000 in additional insurance premiums. In addition to this, you have another $55,000 in indirect costs, making the total cost of this claim approximately $127,000. If your company has a 10 percent profit margin, you will need to generate an additional $1,270,000 to cover these costs.
The indirect costs you pay and the additional premiums caused by an increase in your experience modification underscore why it’s so important to be proactive in your safety efforts and to develop effective claims management strategies to deal with inevitable claims.
Workers’ compensation is more like a finance tool than an insurance policy. Ultimately, through the experience modification, you will pay for your actual claims. The only way to lower the cost of workers’ compensation in the long run is to lower the frequency and severity of the claims that are driving those costs.
Top 10 STEPS to Manage Workers’ Compensation Exposure
- Develop a compliant and effective Injury and Illness Prevention Program.
- Make certain your supervisors have received the appropriate safety training and that safety is part of their annual review.
- Hold regular safety meetings, and make sure they are effective.
- Develop a relationship with the right occupational medical clinic that participates in your insurance company’s medical provider network (MPN), and make sure your entire staff knows where to go in the event of a non-emergency accident.
- Make sure you pay for any claims that qualify as “first aid.”
- Develop a post-accident response protocol, and make sure the appropriate people know what to do in response to an employee injury.
- Implement a transitional duty Return-to-Work Program.
- Actively manage any open claims to make certain the treatment is proceeding as it should and the reserves are fair and not excessive.
- Understand and manage your experience modification.
- Choose the right broker.