What is Workers Compensation? An Essential Guide for Employers and Employees

Workers’ compensation, often referred to as workers’ comp, is a fundamental aspect of workplace protection in many countries, including the United States. It’s a system designed to provide financial and medical benefits to employees who experience job-related injuries or illnesses. Born from the rise of trade union movements in the early 20th century, workers’ compensation addresses the historical lack of protection for workers facing hazardous conditions and the devastating financial consequences of workplace incidents. Understanding what workers’ compensation is, how it functions, and the benefits it offers is crucial for both employers and employees alike.

Workers’ compensation stands as the oldest form of social insurance in the U.S., predating even Social Security and unemployment insurance. This system operates on a “no-fault” basis, meaning that an injured employee generally doesn’t need to prove negligence to receive benefits. Instead, the focus is on whether the injury or illness is work-related. This approach simplifies the process for employees to access necessary support and ensures that they are not burdened with legal battles while recovering.

For employers, workers’ compensation is not just a legal obligation but also a crucial component of risk management and employee well-being. By providing this coverage, employers create a safer and more supportive work environment, fostering a sense of security among their workforce. This, in turn, can lead to increased productivity and reduced absenteeism.

This comprehensive guide will delve into the intricacies of workers’ compensation, exploring the types of benefits available, frequently asked questions about coverage and procedures, and essential resources for both employers and employees to navigate this vital system effectively. Whether you are an employer seeking to understand your responsibilities or an employee wanting to know your rights, this guide aims to provide a clear and thorough understanding of what workers’ compensation truly is.

Understanding Workers Compensation Benefits

Workers’ compensation policies are structured to provide a range of benefits to employees who suffer work-related injuries or illnesses. These benefits are designed to cover various aspects of recovery and support during an employee’s time away from work due to a workplace incident. The specific benefits available can depend on the nature and severity of the injury or illness, as well as the regulations of the specific state or jurisdiction. However, there are five core types of benefits that are commonly included in workers’ compensation coverage.

Medical Care

One of the primary and most crucial benefits of workers’ compensation is medical care. Employees who sustain a work-related injury or illness are entitled to receive comprehensive medical treatment necessary to address their condition. This coverage extends to all medical services that are considered reasonably required to cure or relieve the effects of the injury or illness.

This can encompass a wide spectrum of medical services, including:

• Physician Services: Consultations, examinations, and treatments provided by medical doctors and specialists.
• Hospitalization: Inpatient care, surgeries, and necessary hospital stays.
• Physical Restoration: Rehabilitative services aimed at restoring physical function, such as occupational therapy and functional restoration programs.
• Physical Therapy: Treatments to improve mobility, reduce pain, and restore physical function through exercises and therapeutic techniques.
• Chiropractic Treatment: Care focused on the diagnosis and treatment of neuromuscular disorders, often involving spinal manipulation.
• Dental Care: Treatment for dental injuries sustained in a workplace accident.
• Prescriptions: Medications prescribed by a treating physician to manage pain, infection, or other symptoms related to the injury or illness.
• X-rays and Laboratory Services: Diagnostic imaging and tests necessary to assess the extent and nature of the injury or illness.
• Other Necessary Care: Any other medical care deemed necessary and reasonable by the treating physician to aid in the employee’s recovery, subject to established treatment guidelines.

In many jurisdictions, the process for obtaining medical treatment involves utilization review (UR). Except for certain treatment requests within an employer’s Medical Provider Network (MPN), treating physicians typically submit treatment requests to the workers’ compensation insurer for UR. The insurer then reviews these requests and decides whether to approve, modify, or deny the proposed treatment.

If a treatment request is modified or denied, injured workers have the right to challenge this decision through a process called independent medical review (IMR). IMR provides an avenue for an independent physician to review the case and make a determination on the necessity of the disputed medical treatment.

In the initial stages of a work-related injury or illness, the employer often plays a role in arranging medical treatment. Generally, the employer is responsible for managing medical care for the first 30 days from the date the injury or illness is reported. However, employees may have the option to seek treatment from their personal physician if they have pre-designated that physician prior to the workplace incident. Predesignation requires the employee to formally notify their employer in writing of their choice to be treated by their personal physician in case of a workers’ compensation claim.

If an employee has not pre-designated a personal physician, and the employer or their insurer has opted for a Health Care Organization (HCO) or an MPN, the injured employee will typically receive initial treatment within that network. The ability to switch treating physicians later on can depend on whether the employee is receiving care within an HCO, MPN, or from a pre-designated physician, and specific rules vary by jurisdiction.

First Aid Treatment

First aid is considered a crucial component of medical care within workers’ compensation. Employers are obligated to provide first aid treatment to employees who experience minor workplace injuries. This immediate care is intended to address minor injuries promptly and prevent them from escalating into more serious conditions.

It’s important to note that even in cases where first aid is administered and there is no lost time from work, reporting the incident is often still required. Many jurisdictions mandate that physicians who treat injured employees, even for first aid cases, must file a “Doctor’s First Report of Occupational Injury or Illness” (DFR) with the claims administrator. This reporting requirement ensures proper record-keeping of workplace injuries, regardless of their severity.

There have been concerns raised about potential arrangements between some medical providers and employers that may lead to the underreporting of injuries. In some instances, employers may attempt to influence how injuries are classified, seeking to categorize injuries as “first aid” even when they go beyond that level of care. Such practices can be motivated by a desire to control workers’ compensation premiums. However, these arrangements are considered improper and potentially illegal, as they may contribute to premium fraud and the denial of legitimate workers’ compensation benefits to injured workers.

Temporary Disability Benefits

Temporary disability benefits are designed to provide wage replacement for employees who are temporarily unable to work due to a work-related injury or illness. These benefits help to mitigate the financial impact of lost income during the recovery period.

Eligibility for temporary disability benefits typically begins when an employee is unable to return to work for more than a specified waiting period, often three days. A physician’s certification is usually required to verify that the employee’s inability to work is directly related to the on-the-job injury or illness.

It’s important to note that temporary disability payments generally do not cover the first few days of lost time, unless the employee is hospitalized overnight or is unable to work for an extended period, such as more than 14 days in some jurisdictions.

The benefit amount is typically calculated as a percentage of the employee’s average weekly wage, often around two-thirds, up to a maximum limit set by law. These benefits are usually paid bi-weekly and continue until the employee is able to return to work or until their condition reaches a point of maximum medical improvement, also known as permanent and stationary.

There are statutory limits on the duration of temporary disability benefits, which can vary depending on the date of injury and the nature of the injury or illness. It’s essential to be aware of these limits, as benefits will eventually cease once the maximum allowable period is reached.

Permanent Disability Benefits

Permanent disability benefits are provided when a work-related injury or illness results in a permanent impairment. This means that even after medical treatment, the employee is left with a lasting physical or mental limitation due to the workplace incident. These benefits are intended to compensate for the long-term impact of the impairment on the employee’s ability to work and earn a living.

The determination of permanent disability involves a complex assessment process. The amount of benefits an employee receives is based on a formula that takes into account several factors, including:

• Extent of Physical Injury or Disfigurement: The severity and nature of the permanent impairment, which can range from physical limitations to disfigurement.
• Age of the Employee at the Time of Injury: Older employees may be considered to have a greater impact from a permanent disability due to their remaining working years.
• Employee’s Occupation: The physical demands and skill requirements of the employee’s job are considered, as certain impairments may have a greater impact on some occupations than others.
• Date of Injury: Workers’ compensation laws and benefit levels can change over time, so the date of injury is a crucial factor in determining applicable regulations.

Other factors that may be considered in calculating permanent disability benefits include apportionment, which assesses the extent to which the disability is attributed to work-related factors versus pre-existing conditions or non-work-related factors. An adjustment factor may also be applied to account for the injured worker’s loss of future earning capacity due to the permanent impairment.

Permanent disability benefits are typically paid out in regular installments, often bi-weekly, until a maximum amount is reached or a lump-sum settlement is negotiated. The percentage of permanent disability is determined using a standardized “Schedule for Rating Permanent Disabilities.” This schedule provides a framework for assessing impairments and assigning a disability rating. The specific schedule used depends on the date of injury.

The assessment of permanent impairment is typically conducted by a physician. This may be the treating physician, a Qualified Medical Evaluator (QME), or an Agreed Medical Evaluator (AME) if the employee is represented by an attorney. QMEs are physicians certified by the workers’ compensation system to perform impartial medical evaluations. AMEs are physicians jointly selected by the parties in a case, often when the employee is represented by counsel.

Disagreements can arise regarding the treating physician’s opinion on permanent impairment. In such cases, if the employee is not represented by an attorney, they usually have the right to request a QME from a panel provided by the workers’ compensation agency to conduct an independent evaluation. If the employee is represented by an attorney, the parties will typically attempt to agree on an AME. If an AME cannot be agreed upon, a QME panel may be used, and each party may have the opportunity to strike a name from the panel to narrow down the selection.

Supplemental Job Displacement Benefit (SJDB)

The Supplemental Job Displacement Benefit (SJDB) is a voucher program designed to assist injured workers in re-entering the workforce when they are unable to return to their previous job due to a permanent disability. This benefit is available in some jurisdictions, and the specific rules and availability may vary depending on the date of injury.

For injuries occurring between January 1, 2004, and January 1, 2013, the SJDB typically takes the form of a non-transferable voucher that can be used for education-related retraining and skill enhancement at state-approved or accredited schools. The voucher can cover expenses such as tuition, fees, books, and other required materials. A portion of the voucher, up to 10 percent, may also be used for vocational or return-to-work counseling services.

To qualify for the SJDB during this period, the injured employee must have sustained a permanent disability, be unable to return to work with their previous employer within 60 days after temporary disability benefits end, and the employer must not have offered suitable modified or alternative work in a timely manner. The maximum voucher amount is set by law and varies based on the extent of permanent disability.

For injuries occurring on or after January 1, 2013, the SJDB may have different provisions. In some jurisdictions, it continues to be a non-transferable voucher for retraining and skill enhancement. However, the scope of eligible expenses may be broader, potentially including tuition, fees, books, tools, and expenses at California public schools or other providers listed on the state’s eligible training provider list. It may also cover licensing or professional certification fees, exam fees, exam preparation courses, computer equipment (up to a certain limit), and miscellaneous expenses.

Employees with injuries on or after January 1, 2013, who have a permanent disability and are not offered regular, modified, or alternative work by their employer are typically eligible for this benefit. The voucher amount for this period may be a fixed amount, such as up to $6,000, regardless of the degree of permanent disability. In many cases, the SJDB voucher cannot be redeemed as part of a settlement agreement.

Return-to-Work Supplement Program (RTWSP)

The Return-to-Work Supplement Program (RTWSP) is designed to provide additional financial assistance to injured workers who experience a significant loss of earnings due to their work-related injury, even after receiving permanent disability benefits. This program aims to further support employees in their return to the workforce and mitigate the financial impact of reduced earning capacity.

Eligibility for the RTWSP often requires that the employee has a date of injury on or after a specific date, such as January 1, 2013, and has received an SJDB voucher for that injury. To apply for the RTWSP, employees typically need to complete an application and submit it to the administering agency, such as the Department of Industrial Relations (DIR) in some states. There may be a deadline for application submission, such as within one year of the date the SJDB voucher was sent to the employee.

If an employee is found eligible for the RTWSP, they may receive a one-time supplemental payment. The amount of this payment can vary, but in some jurisdictions, it is a fixed sum, such as $5,000. The RTWSP is intended to provide additional financial support to workers who have experienced a disproportionate loss of earnings relative to their permanent disability rating.

Death Benefits

In the tragic event of a workplace fatality, workers’ compensation systems provide death benefits to support the deceased employee’s surviving dependents. These benefits are designed to alleviate the financial hardship faced by families due to the loss of a wage earner.

Death benefits typically include two main components:

• Reasonable Burial Expenses: Workers’ compensation usually covers the costs associated with funeral and burial arrangements, up to a maximum amount set by law.
• Support Payments to Qualified Surviving Dependents: Eligible dependents, such as spouses, children, or other family members who were financially reliant on the deceased employee, may receive ongoing support payments. These payments are usually made at a weekly rate, often based on a percentage of the deceased employee’s average weekly wage, and may continue for a specified period.

The total death benefit amount can vary depending on factors such as the number of dependents and their degree of dependency (partial or total). Workers’ compensation laws outline specific criteria for determining who qualifies as a dependent and the duration of support payments.

Frequently Asked Questions

Workers’ compensation can be a complex system to navigate. Here are answers to some frequently asked questions to clarify common points of confusion for both employers and employees.

How Is Coverage Structured in a Workers’ Compensation Policy?

Workers’ compensation coverage is typically provided under Part One of a workers’ compensation insurance policy. Under this part, the insurance company agrees to promptly pay all benefits and compensation that an employer is legally obligated to provide to an injured worker under the applicable workers’ compensation laws of the state or states listed in the policy’s declarations.

A key principle of workers’ compensation is that it is considered the “exclusive remedy” for injured employees. This means that, in most cases, when an employee sustains a work-related injury or illness, workers’ compensation benefits are the sole legal recourse against their employer. Generally, an injured employee cannot sue their employer in civil court for damages related to the injury if workers’ compensation coverage is in place. This “trade-off” provides employers with a degree of protection from lawsuits while ensuring that employees receive benefits without having to prove fault.

However, it’s important to note that employers’ liability insurance, provided under Part Two of a workers’ compensation and employers’ liability insurance policy, can offer additional protection for employers. Employers’ liability coverage addresses situations where an employee’s injury or disease may not fall squarely within the scope of workers’ compensation laws. This coverage can protect employers from potential lawsuits in circumstances that are not strictly considered “workers’ compensation” cases. Employers should consult with a licensed insurance broker or agent to understand the nuances of employers’ liability coverage and how it complements workers’ compensation insurance.

Who Is Required to Purchase Workers’ Compensation Insurance?

The requirement to purchase workers’ compensation insurance is generally determined by state law. In many jurisdictions, including California, employers are legally mandated to provide workers’ compensation benefits to their employees. The threshold for this requirement often depends on the number of employees a business has. In many states, if a business employs even one or more employees, it must have workers’ compensation coverage in place.

This requirement extends to various types of businesses, regardless of size or industry. Even businesses with just a single employee are typically obligated to comply. Furthermore, some states may have specific rules requiring certain types of contractors to carry workers’ compensation insurance, even if they do not have employees themselves. This is often the case in industries like construction, where independent contractors may be misclassified as employees.

Business owners, such as sole proprietors or partners, are generally not considered “employees” of their own businesses and are not automatically covered by workers’ compensation. However, in some cases, a business owner may choose to purchase workers’ compensation insurance to cover themselves. This is often done to provide personal injury and disability coverage for the owner in case of a work-related incident. If a sole proprietor or partner wishes to be included in workers’ compensation coverage, this must be explicitly stated in the policy or added through an endorsement.

It’s worth noting that for business owners like sole proprietors, health, life, and disability income insurance may be viable alternatives to workers’ compensation for personal coverage. These types of insurance can provide financial protection in case of injury or illness, whether work-related or not. Business owners should consult with a licensed insurance broker or agent to discuss their specific needs and explore the best coverage options for their situation.

Corporate officers and directors of private or quasi-public corporations are typically considered employees and must be included in workers’ compensation coverage if they perform actual services for the corporation and receive pay. However, there may be exceptions. In some states, officers or directors who own a significant percentage of the corporation’s stock and are covered by a health insurance policy may elect to be excluded from workers’ compensation coverage by executing a written waiver. Similarly, general partners in a partnership or managing members of a limited liability company (LLC) who receive wages, regardless of profits, may also be eligible to waive workers’ compensation coverage in writing. Employers should consult with a licensed insurance broker or agent to discuss the specific rules regarding inclusion or exclusion of corporate officers, directors, partners, and LLC members in their workers’ compensation policy.

State labor codes and workers’ compensation laws define who is considered an “employee” for coverage purposes. These definitions may automatically exclude certain categories of workers, while also providing mechanisms for other specific workers to waive coverage. It’s important for businesses to understand these definitions and exclusions to ensure compliance. However, even if certain workers are not legally required to be covered, employers may choose to provide workers’ compensation coverage for them voluntarily. Developing a relationship with a knowledgeable insurance broker or agent is beneficial for businesses to navigate these complex eligibility issues and determine the appropriate workers’ compensation coverage based on their organizational structure and workforce.

How Is Workers’ Compensation Insurance Purchased?

Employers have several options for purchasing workers’ compensation insurance, depending on their state and business needs. The most common methods include purchasing coverage from a licensed insurance company, obtaining coverage through a state-operated fund, or self-insuring.

Licensed Insurance Companies: Employers can purchase workers’ compensation insurance from private insurance companies that are licensed to operate in their state. These companies offer a range of workers’ compensation policies and services. Working with a commercial insurance broker or agent can be beneficial in this process. A broker or agent can help businesses assess their coverage needs, obtain quotes from multiple insurance companies, and navigate the policy purchase process. Brokers and agents can provide valuable expertise and guidance in selecting the right coverage and insurer.

State Compensation Insurance Fund (State Fund): Some states operate a state compensation insurance fund, often referred to as the “State Fund.” This is a state-run entity that provides workers’ compensation insurance on a non-profit basis. State Funds typically compete with private insurance companies for business and also serve as an insurer of last resort in some states. This means that if private insurers are unwilling to offer workers’ compensation coverage to a particular employer (often due to high-risk factors), the State Fund may provide coverage. Businesses interested in exploring coverage through the State Fund can contact the fund directly or work with a licensed broker or agent who can assist with State Fund applications.

Self-Insurance: In some states, employers have the option to self-insure their workers’ compensation obligations. Self-insurance means that instead of purchasing an insurance policy from an external insurer, the employer assumes direct responsibility for paying workers’ compensation claims. To become self-insured, businesses typically need to meet certain financial and administrative requirements set by the state’s workers’ compensation agency, such as the Department of Industrial Relations (DIR) in California. These requirements often include posting security deposits or surety bonds to ensure that funds are available to pay claims. Historically, self-insurance was primarily an option for very large companies with strong financial resources. However, in recent years, group self-insurance has become more popular. Group self-insurance allows smaller employers in the same industry to pool their workers’ compensation liabilities and collectively self-insure. This can make self-insurance more accessible to smaller businesses. Employers interested in self-insurance should contact their state’s workers’ compensation agency or the Office of Self-Insurance Plans (OSIP) for detailed information on requirements and the application process.

What Happens If an Employer Fails to Purchase Workers’ Compensation Insurance?

Failing to secure workers’ compensation insurance when legally required can have severe consequences for employers. State laws typically impose significant penalties for non-compliance.

Stop Orders and Fines: State labor enforcement agencies, such as the Division of Labor Standards Enforcement (DLSE), have the authority to issue “stop orders” to businesses found to be operating without required workers’ compensation insurance. A stop order mandates the immediate cessation of business operations until the employer obtains the necessary coverage. In addition to stop orders, DLSE can assess substantial fines. The amount of fines may depend on factors like whether the employer’s uninsured status was discovered through a routine investigation or as a result of an injured worker filing a claim with the Uninsured Employers Benefits Trust Fund (UEBTF).

Criminal Penalties: In many jurisdictions, failing to have workers’ compensation coverage is not only a civil violation but also a criminal offense. California Labor Code, for example, classifies it as a misdemeanor. Criminal penalties can include imprisonment in county jail for up to one year, fines that are double the amount of workers’ compensation premiums that would have been required during the uninsured period (with a minimum fine amount, such as $10,000), or both imprisonment and fines. The state may also impose additional penalties of up to $100,000 against illegally uninsured employers.

Financial Liability for Employee Injuries: If an employee is injured or becomes ill due to work-related factors and the employer is uninsured, the employer becomes directly responsible for paying all costs associated with the injury or illness. This can include medical expenses, lost wages, and other benefits that would have been covered by workers’ compensation insurance. These costs can be substantial and financially devastating for a business.

Loss of Exclusive Remedy Protection: Workers’ compensation benefits are typically considered the “exclusive remedy” for work-related injuries when an employer is properly insured. However, this protection is lost when an employer is illegally uninsured. In such cases, an injured employee retains the right to file a civil lawsuit against the employer in addition to filing a workers’ compensation claim. This means the employer could face both workers’ compensation liabilities and potentially significant damages from a civil lawsuit.

Liability to Uninsured Employers Benefits Trust Fund (UEBTF): If an uninsured employer fails to pay required workers’ compensation benefits, they may become liable to reimburse the UEBTF for any benefits the fund pays out to the injured employee.

Insurance Fraud Prosecution: Willfully failing to secure workers’ compensation insurance as required by law can be considered insurance fraud and may lead to criminal prosecution. State agencies, such as the California Department of Insurance (CDI), work with other agencies and local district attorneys to investigate and prosecute cases of workers’ compensation fraud, including employers who intentionally avoid obtaining coverage.

What Is the Uninsured Employers Benefits Trust Fund and the Subsequent Injuries Benefits Trust Fund?

States often have specialized funds to provide safety nets for workers in specific situations. Two such funds commonly associated with workers’ compensation are the Uninsured Employers Benefits Trust Fund (UEBTF) and the Subsequent Injuries Benefits Trust Fund (SIBTF).

Uninsured Employers Benefits Trust Fund (UEBTF): The UEBTF is designed to protect employees who are injured on the job while working for illegally uninsured employers. When a work-related injury or illness occurs and the employer lacks workers’ compensation insurance, the employee can file a claim with the UEBTF. The UEBTF then steps in to handle the workers’ compensation claim, providing benefits to the injured worker that would typically be paid by an insurance company. This ensures that injured workers are not left without recourse simply because their employer failed to obtain required coverage. The UEBTF is funded through various sources, such as penalties assessed against uninsured employers. After paying benefits to an injured worker, the UEBTF will actively attempt to recover the amounts paid from the uninsured employer. This recovery process can involve legal actions to recoup the funds and hold the uninsured employer accountable.

Subsequent Injuries Benefits Trust Fund (SIBTF): The SIBTF addresses situations where an employee with a pre-existing permanent disability or impairment suffers a subsequent workplace injury or illness. The purpose of the SIBTF is to encourage employers to hire individuals with pre-existing conditions without fear of disproportionate workers’ compensation liability. Without the SIBTF, an employer might be hesitant to hire someone with a prior disability, fearing that a new workplace injury could lead to liability for the combined effect of both the old and new conditions. The SIBTF mitigates this concern by providing additional compensation to the employee when certain conditions are met. To be eligible for SIBTF benefits, the employee typically must have a combined permanent disability of at least 70 percent resulting from the pre-existing condition and the subsequent workplace injury. There are also other eligibility requirements that must be met. It’s important to understand that under workers’ compensation law, employers are generally not held liable for the combined disability if a portion of the disability is due to non-industrial (non-work-related) factors. The employer is typically only responsible for the compensation owed due to the new work-related injury, not the pre-existing condition. The SIBTF, when applicable, may provide benefits to cover the portion of the combined disability that is attributed to the pre-existing condition, subject to eligibility criteria.

How Is Workers’ Compensation Premium Calculated?

Workers’ compensation insurance premiums are not arbitrary figures. They are calculated based on a structured system that considers various factors to reflect the risk associated with insuring a particular employer. The premium calculation process involves several key components:

Classification: The foundation of premium calculation is the classification system. Employers are categorized into different classifications based on the nature of their business operations and the occupations of their employees. These classifications are designed to group employers with similar levels of risk. Classifications are developed and assigned codes by organizations like the Workers’ Compensation Insurance Rating Bureau (WCIRB) and are typically approved by the state Insurance Commissioner. Workers’ compensation insurers generally use these standardized classifications when writing policies. Each classification code is associated with a specific rate that reflects the average expected cost of workers’ compensation claims for businesses in that industry.

Open Rating: Many states, including California, operate under an “open rating” system for workers’ compensation insurance. In an open rating system, insurance companies have the flexibility to set their own rates for each industry classification code. However, these rates must be filed with and approved by the state’s Department of Insurance or Insurance Commissioner. Rate review processes ensure that rates are adequate to cover insurance companies’ losses and expenses, are not unfairly discriminatory, and do not tend to create monopolies in the marketplace. Rate adequacy is a primary concern, as rates must be sufficient to maintain the financial solvency of insurance companies and ensure they can meet their claim obligations. While regulators scrutinize rate adequacy and fairness, they generally do not have the authority to disapprove rates solely because they are considered excessive.

Premium Modification: The classification code and its associated rate are the starting point for premium calculation. The rate is expressed in dollars and cents per $100 of payroll. To calculate the “base premium,” the estimated payroll for each classification is multiplied by the applicable rate (per $100 of payroll). The base premium is then further adjusted through various rating plans and modifications.

Experience Modification: One of the most significant premium adjustments is the “experience modification” (often called the “X-Mod”). The experience modification is a factor, expressed as a percentage, that reflects an employer’s past workers’ compensation claims experience compared to other employers of similar size in the same industry. It is calculated annually by organizations like the WCIRB using a formula approved by the state. The formula considers an employer’s payroll and loss data (paid losses and loss reserves) over a specific “experience period,” typically several years. An experience modification of 100% is considered average. An X-Mod less than 100% indicates better-than-average claims experience, resulting in a premium discount. Conversely, an X-Mod greater than 100% reflects worse-than-average experience, leading to a premium surcharge. The experience modification is applied to the base premium, along with other modifications, to arrive at the estimated policy premium.

Prospective Rating: The standard premium calculation method described above is known as “prospective rating.” Premiums are calculated at the beginning of the policy period based on estimated payroll and anticipated risk. While other rating plans exist, such as dividend plans or retrospective rating, prospective rating is the most common approach for workers’ compensation.

Premium Audit: The final premium for a workers’ compensation policy cannot be definitively calculated until the policy term ends and a premium audit is conducted. Insurers have the right to audit employers’ payroll records to verify the accuracy of the initial payroll estimates used to calculate the premium. If the audit reveals that the actual payroll was higher than estimated, the employer will owe additional premium. If the payroll was lower, the insurer will issue a return premium. Payroll fluctuations are common, so some insurers offer monthly payroll reporting options to adjust premiums throughout the policy term and minimize large audit adjustments at the end. Employers should cooperate with premium audits, as failure to comply can lead to policy cancellation or non-renewal, and insurers can pursue legal means to collect outstanding premiums. Deliberate underreporting of payroll is considered insurance fraud and can have serious legal consequences. The WCIRB also has the authority to audit employer payroll records to assess the accuracy of insurer audits.

Does the CDI Handle Workers’ Compensation Claim Issues?

It’s important to understand the roles of different state agencies in workers’ compensation. While the California Department of Insurance (CDI) plays a regulatory role in workers’ compensation insurance, it is generally not the primary agency for resolving disputes related to individual workers’ compensation claims. The primary agency for assisting employees and employers with workers’ compensation claims and resolving claim disputes is the Division of Workers’ Compensation (DWC).

Role of the Division of Workers’ Compensation (DWC): The DWC is a division of the Department of Industrial Relations (DIR) and has exclusive jurisdiction over workers’ compensation claim disputes. If an employee or employer has questions or concerns about a workers’ compensation claim, the DWC’s Information and Assistance Unit is the first point of contact. This unit provides information, guidance, and assistance to unrepresented injured workers and employers in understanding their rights and responsibilities and navigating the claims process. If the Information and Assistance Unit is unable to resolve a dispute informally, an injured worker can file a formal “Application for Adjudication” with the DWC to initiate a formal dispute resolution process. The DWC has various mechanisms for resolving disputes, including mediation, arbitration, and hearings before workers’ compensation judges.

Role of the California Department of Insurance (CDI): The CDI’s primary role in workers’ compensation is related to the regulation of insurance companies, brokers, and agents, and the oversight of workers’ compensation insurance rating and underwriting practices. The CDI handles issues related to:

• Insurer Compliance with Filed Rates: Ensuring that insurance companies charge rates that are in compliance with their filed rate schedules.
• Rating Errors: Investigating and resolving disputes related to errors in premium calculations or rating factors.
• Classification and Experience Modification Disputes: Addressing disputes regarding employer classifications and experience modification factors.
• Failure to Provide Loss History Reports: Handling complaints about insurers failing to provide required loss history reports (loss runs) to policyholders.
• Cancellation and Nonrenewal Notices: Reviewing cancellation and nonrenewal practices to ensure compliance with regulations.
• Audit Disputes: Addressing certain types of disputes related to premium audits.
• Dividend Plans: Overseeing the filing and operation of workers’ compensation dividend plans.
• Broker-Agent Handling: Investigating complaints about the conduct of insurance brokers and agents.
• Insurance Fraud: Investigating suspected cases of workers’ compensation fraud, including fraud committed by employers, employees, medical providers, or insurers. The CDI’s Fraud Division has the authority to investigate and pursue criminal charges in cases of fraudulent workers’ compensation claims or premium fraud.

While the CDI’s jurisdiction over claim disputes is limited, it plays a vital role in ensuring the integrity of the workers’ compensation insurance system and protecting consumers from unfair or unlawful insurance practices. Consumers experiencing issues related to workers’ compensation rating, underwriting, or suspected fraud should contact the CDI for assistance. The CDI can often help resolve issues within its jurisdiction or refer consumers to the appropriate agency, such as the DWC, for matters outside of the CDI’s purview.

What Workers’ Compensation Issues Does the CDI Handle?

The California Department of Insurance (CDI) is primarily concerned with the regulatory aspects of workers’ compensation insurance, focusing on rating, underwriting, and market conduct. Consumers can contact the CDI for assistance with a range of workers’ compensation insurance-related issues that fall under its jurisdiction. Common issues handled by the CDI include:

• Insurer Compliance with Filed Rates: If you suspect that your workers’ compensation insurer is not charging premiums in accordance with their rates filed with the CDI, you can file a complaint. The CDI can investigate to ensure insurers are adhering to their approved rate schedules.
• Rating Errors: If you believe there has been an error in the calculation of your workers’ compensation premium, such as incorrect application of classification codes, experience modification factors, or other rating elements, the CDI can review your case.
• Classification and Experience Modification Disputes: Disagreements regarding your assigned industry classification code or your experience modification factor can be addressed with the CDI. The CDI has procedures for appealing classification and experience modification decisions.
• Failure to Provide Loss History Reports: Insurers are required to provide policyholders with loss history reports (loss runs) upon request, particularly in certain situations like policy renewal or cancellation. If your insurer fails to provide these reports as required, the CDI can intervene.
• Cancellation and Nonrenewal Notices: The CDI reviews insurer practices related to policy cancellation and nonrenewal to ensure they comply with regulations. If you believe your policy was improperly cancelled or nonrenewed, you can seek assistance from the CDI.
• Audit Disputes: While the DWC handles broader claim disputes, the CDI may address specific types of audit disputes related to rating and premium calculation accuracy.
• Dividend Plans: The CDI oversees the filing and operation of workers’ compensation dividend plans. If you have concerns about the administration or transparency of a dividend plan, you can contact the CDI.
• Broker-Agent Handling: Complaints about the conduct or actions of insurance brokers or agents related to workers’ compensation policies can be filed with the CDI. This could include issues like misrepresentation, failure to provide proper advice, or unethical sales practices.
• Insurance Fraud: The CDI’s Fraud Division investigates suspected workers’ compensation fraud. You can report suspected fraud to the CDI, even anonymously. The CDI investigates fraud committed by various parties, including employers (premium fraud), employees (claim fraud), medical providers, and insurers.

The CDI has established procedures for disputing experience modifications and classification assignments, including formal appeals processes outlined in the California Code of Regulations. When facing difficulties related to workers’ compensation rating and underwriting, contacting the CDI is a valuable step. The CDI can often assist in resolving these types of issues. If an issue falls outside of the CDI’s jurisdiction, they will typically refer you to the appropriate state agency for assistance.

Q: What is a loss reserve?

A: In workers’ compensation insurance, a loss reserve is a crucial financial estimate made by insurance companies. It represents the insurance company’s best estimate of the ultimate cost of a particular claim. When a workers’ compensation claim is reported, the insurance company, typically through a claims adjuster, sets aside a loss reserve. This is an amount of money earmarked to cover all anticipated costs associated with that claim, including medical expenses, disability benefits, vocational rehabilitation, legal costs, and other potential expenses.

Setting accurate loss reserves is critical for several reasons:

• Financial Solvency: Adequate loss reserves are essential for maintaining the financial stability of insurance companies. Insurers must hold sufficient reserves to meet their current and future claim obligations. Underestimating reserves can lead to financial strain and even insolvency if an insurer does not have enough funds to pay claims as they come due.
• Accurate Financial Reporting: Loss reserves are a significant component of an insurance company’s financial statements. Accurate reserves provide a realistic picture of the insurer’s financial condition and obligations. Both over-reserving and under-reserving can distort the financial picture and lead to inaccurate assessments of an insurer’s financial health.
• Premium Calculation and Experience Modification: Loss reserve data, along with paid losses, is reported to organizations like the WCIRB. This data is used to calculate experience modifications, which directly impact employers’ future premiums. Inflated loss reserves can lead to higher experience modifications and, consequently, increased premiums for employers. Conversely, artificially low reserves can mask potential financial problems for the insurer.
• Claims Management and Resource Allocation: Loss reserves help insurers manage claims effectively and allocate resources appropriately. By estimating the potential cost of each claim, insurers can prioritize claims handling, allocate adjuster workloads, and plan for future payouts.

Claims adjusters play a key role in setting loss reserves. They use their expertise, experience with similar claims, and available information about the specific claim to estimate the ultimate cost. This is not an exact science, and loss reserves are inherently estimates that may be adjusted over time as more information becomes available about the claim’s progression and ultimate resolution. Insurers regularly review and revise loss reserves based on updated medical reports, disability status, and other relevant factors. Maintaining accurate loss reserves is an ongoing process throughout the life of a claim. Poor loss reserving practices, whether overestimation or underestimation, can have negative consequences for both insurers and policyholders. Therefore, insurers strive to maintain sound loss reserving practices to ensure financial stability, accurate reporting, and fair premium levels.

Q: How does an employer request a workers’ compensation premium and loss history report?

A: Employers have the right to access their workers’ compensation premium and loss history information. This information is valuable for understanding their claims experience, managing safety, and shopping for insurance coverage. These reports are commonly referred to as “loss runs.”

To request a workers’ compensation premium and loss history report, employers typically need to make a written request to their insurance company. The request should come from the policyholder or their authorized insurance broker or agent. California Insurance Code Section 11663.5 outlines specific circumstances under which insurers are obligated to provide loss runs within 10 business days of a written request. These circumstances include:

1. Policy Cancellation or Nonrenewal: If a workers’ compensation policy is cancelled or nonrenewed by the insurer, the policyholder is entitled to request and receive loss runs.
2. Pre-Renewal Request: Employers can request loss runs within 60 days prior to the renewal date of their existing policy. This allows them to review their claims history before policy renewal and use the information for comparing quotes from other insurers.
3. Insurer Downgrade: If a nationally recognized insurance rating service downgrades the policyholder’s current insurer to a financial rating below “secure” or “good,” or to a rating that could negatively impact the policyholder’s business operations, the policyholder can request loss runs. This provision is designed to help employers assess the financial stability of their insurer.
4. Insurer Conservation or Cease Writing Business Order: If the policyholder’s current insurer is placed under conservation by the Department of Insurance or is ordered to cease writing business, loss runs can be requested. This situation indicates potential financial distress of the insurer.

In these specific circumstances, the insurer has a legal obligation to provide the loss run report within 10 business days of receiving a written request. If an insurance company fails to comply with a written request for loss runs under these provisions, the policyholder can contact the California Department of Insurance (CDI) for assistance. The CDI can investigate and help ensure that insurers fulfill their obligation to provide loss history information. Even outside of these specific circumstances, employers generally have the right to request and receive loss runs from their insurer, although the timeframe for providing the report may not be legally mandated to be within 10 business days. Maintaining access to loss history information is a valuable tool for employers to manage their workers’ compensation program effectively.

Q: What is a minimum premium?

A: In workers’ compensation insurance, as with other types of insurance, a “minimum premium” is the lowest premium amount that an insurance company is willing to charge for a policy, regardless of the standard premium calculation. Insurance companies incur various fixed costs in issuing and servicing a policy, regardless of the size of the insured business or the calculated premium based on payroll and rates. These fixed costs include policy issuance expenses, underwriting costs, administrative overhead, and regulatory compliance expenses.

When a business has a very small payroll, the standard premium calculation (based on payroll and classification rates) may result in a very low premium amount. If this calculated premium is so low that it does not even cover the insurance company’s basic fixed costs of issuing and servicing the policy, it becomes financially impractical for the insurer to provide coverage at that price. To address this, insurance companies establish minimum premiums. The minimum premium is the insurer’s predetermined floor – the smallest premium they are willing to accept to issue a policy. Even if the standard premium calculation yields a lower amount, the minimum premium will be charged.

Each insurance company sets its own minimum premium requirements, which must be filed with the state Department of Insurance as part of their overall rating plan. Minimum premiums vary among insurers and may depend on factors such as the industry, risk profile, and policy terms. Minimum premiums ensure that insurance companies can cover their basic expenses associated with providing coverage, even for small businesses with low calculated premiums. For very small businesses with limited payroll, the minimum premium can sometimes represent a significant portion of their overall workers’ compensation insurance cost. When comparing workers’ compensation quotes, businesses should pay attention to the minimum premium requirements of different insurers, as this can impact the overall cost of coverage, especially for smaller employers.

Q: What happens when an employer cancels a policy during the policy year?

A: When an employer decides to cancel a workers’ compensation insurance policy before its normal expiration date (mid-term cancellation), the financial implications depend on the policy terms and state regulations. The primary concern is the return of unearned premium, which is the portion of the premium paid for the coverage period that has not yet elapsed at the time of cancellation.

Generally, when an employer cancels a workers’ compensation policy mid-term, the insurance company is required to return any unearned premium to the policyholder. However, the method of calculating the returned premium can vary. The standard method is a “pro rata” cancellation. In a pro rata cancellation, the unearned premium is returned proportionally to the remaining policy period. For example, if a policy is cancelled exactly halfway through its term, the insurer would refund 50% of the original premium. This method is considered fair as it reflects the actual coverage period provided.

However, some insurance policies, and in some states, allow for “short-rate” cancellation. A short-rate cancellation includes an administrative penalty charged to the policyholder for cancelling the policy before the end of its term. In a short-rate cancellation, the insurer retains a portion of the unearned premium as a penalty, in addition to the earned premium for the coverage period. This means the policyholder receives a smaller refund of unearned premium compared to a pro rata cancellation. The specific short-rate penalty is usually defined in the policy terms and may be a percentage of the unearned premium. For an insurer to apply short-rate cancellation, they are typically required to disclose this cancellation method to the policyholder upfront, in accordance with state insurance regulations, such as California Insurance Code Section 481(c). If the policyholder is not properly informed about short-rate cancellation, pro rata cancellation may be required.

In some cases, even after calculating the pro rata or short-rate return premium, the resulting amount may be less than the minimum premium for the policy. In such situations, the insurance company may charge the minimum premium for the cancelled policy. This means that even if a refund is calculated, if it falls below the minimum premium threshold, no refund or only a partial refund may be issued, depending on the minimum premium amount. If an employer encounters problems with a policy cancellation or issues related to premium refunds, they can contact their state’s Department of Insurance (e.g., the CDI in California) for assistance. The Department can review the cancellation and refund calculation to ensure it complies with regulations and policy terms.

Q: How does the insolvency of an insurance company affect outstanding claims?

A: The insolvency of a workers’ compensation insurance company is a serious event, but systems are in place to protect both employers and employees in such situations. When an insurance company becomes financially insolvent and is unable to meet its obligations, state insurance regulators step in to manage the situation.

Conservation and Liquidation Process: The state Insurance Commissioner, under court appointment, oversees the conservation and liquidation of insolvent insurance companies. The Conservation and Liquidation Office (CLO) of the state’s Department of Insurance is responsible for managing the details of this process. Conservation is an initial step where the regulator takes control of the insurer’s assets and operations to try to rehabilitate the company. If rehabilitation is not possible, the process moves to liquidation, where the insurer’s assets are sold off to pay outstanding debts and claims.

California Insurance Guarantee Association (CIGA): To provide a safety net for policyholders and claimants in case of insurer insolvency, many states have insurance guarantee associations. In California, this is the California Insurance Guarantee Association (CIGA). CIGA is a state-mandated entity funded by assessments on solvent insurance companies operating in the state. When a workers’ compensation insurer becomes insolvent, CIGA steps in to pay covered claims of the insolvent insurer. CIGA’s role is crucial in ensuring that injured workers continue to receive their benefits and employers are protected from unpaid claims obligations even when their insurer fails.

Protection for Employees and Employers: CIGA acts as a guarantee fund, ensuring that workers’ compensation claim payments will continue to be made, even if the insolvent insurance company’s assets are insufficient to cover all claims. CIGA works closely with the CLO to facilitate the smooth transfer of claims and ensure uninterrupted payment of benefits to injured workers. This provides significant relief to both employees who rely on workers’ compensation benefits and employers who have purchased insurance to cover their liabilities. CIGA’s coverage is subject to certain limits and legal provisions, but it generally provides substantial protection for workers’ compensation claims in the event of insurer insolvency. Employers and employees concerned about the insolvency of a workers’ compensation insurer can contact their state’s Department of Insurance or CIGA for information and assistance.

Q: What exactly is a dividend plan?

A: A dividend plan in workers’ compensation insurance is a type of rating plan that offers employers the potential to share in the profits of their insurance company. Policies with dividend plans are often referred to as “participating policies” because the policyholder participates in the insurer’s financial results. Unlike standard “prospective rating,” where the premium is fixed at the policy inception, dividend plans introduce an element of uncertainty and potential reward based on the insurer’s performance.

How Dividend Plans Work: Under a dividend plan, the initial premium is still calculated prospectively. However, the policy includes a provision that, if the insurance company achieves a certain level of profitability during the policy period, and potentially if the individual employer also has good loss experience, the insurer may declare and pay a dividend back to the policyholder. The payment of a dividend is not guaranteed and is contingent on several factors, primarily the insurer’s overall profitability. Some dividend plans may also consider the individual employer’s loss experience – employers with fewer and less costly claims may be more likely to receive a dividend.

Types of Dividend Plans: Various types of dividend plans exist, each with different provisions and requirements. Some plans may be based solely on the insurer’s overall profitability, while others may incorporate individual loss experience as a factor. The specific terms and conditions of a dividend plan are outlined in the policy documents and must be filed with and approved by the state Department of Insurance.

Contingency and Non-Guarantee: It is crucial to understand that dividends in these plans are not guaranteed. The payment and amount of any dividend are contingent on the insurer’s financial performance and, in some cases, the policyholder’s loss experience. If the insurer does not achieve sufficient profitability, or if the policyholder has poor loss experience (depending on the plan’s terms), no dividend may be paid. The potential for a dividend is an attractive feature, but it is not a guaranteed premium reduction.

Broker-Agent Role: Employers interested in exploring dividend plan options should discuss this with their insurance broker or agent. Brokers can explain the different types of dividend plans available, help assess if a dividend plan is suitable for the employer’s risk profile and financial goals, and assist in obtaining quotes for policies with dividend provisions. All dividend plans must be filed with and approved by the state Department of Insurance to ensure they are fair and transparent.

Q: Can an insurance broker-agent or insurance company guarantee the amount of a future workers’ compensation dividend?

A: No, insurance brokers, agents, or insurance companies are strictly prohibited from guaranteeing or promising the amount of future workers’ compensation dividends. State insurance regulations, such as the California Code of Regulations (CCR), explicitly forbid any guarantees or promises regarding future dividend payments. This prohibition is in place to ensure transparency and prevent misrepresentation of dividend plans.

Regulations Against Guarantees: Insurance regulations recognize that dividends are contingent on future financial performance, which is inherently uncertain. Guaranteeing a future dividend amount would be misleading and potentially deceptive, as actual dividend payments depend on factors that cannot be predicted with certainty at the time of policy inception. Therefore, regulations prohibit any statements that directly or indirectly promise a specific future dividend amount.

Permitted Illustrations and Disclosures: While guarantees are forbidden, brokers or company representatives may provide illustrations of past dividend payment amounts for informational purposes. These illustrations can show historical dividend payouts under similar plans to give employers an idea of potential dividend history. However, any such illustrations must be accompanied by clear disclosures stating that past dividend performance is not indicative of future results, and that future dividends are not guaranteed. Policyholder dividend statements and marketing materials cannot directly or indirectly imply that future dividend payments are guaranteed or can be promised.

Reporting Misrepresentation: If an employer believes that a broker-agent or company representative is misrepresenting a dividend plan, especially by directly or indirectly promising future dividend results, they should immediately report this to their state’s Department of Insurance (e.g., the CDI in California). Misrepresentation of dividend plans is a serious regulatory violation and can result in disciplinary actions against the broker, agent, or insurance company. Employers should rely on clear and accurate information about dividend plans, understanding that dividends are potential, not guaranteed, benefits.

Q: What can an employer do if there is a dispute regarding a workers’ compensation classification code?

A: Disputes regarding workers’ compensation classification codes can arise between employers and insurance companies. If an employer believes that their assigned classification code is incorrect, it can lead to inaccurate premium calculations. Fortunately, there are established procedures for resolving classification code disputes.

Initial Steps – Communication with Insurer: The first step for an employer disputing a classification code is to communicate with their insurance broker or agent and/or the insurance company underwriter. Often, a simple discussion and explanation can resolve the issue. The insurer should be able to explain the rationale behind the assigned classification code and provide information supporting their decision. If the insurance company changes a classification code that results in a premium increase, they are typically required to notify the employer in writing within a specific timeframe (e.g., 30 days in California, as per Insurance Code Section 11753.1(b)), unless the reclassification is due to a regulatory change.

Formal Complaint to Insurer: If communication with the insurer does not resolve the dispute, the employer can file a formal written complaint with the insurance company. The insurer should have an internal process for reviewing classification code disputes and responding to employer complaints.

Appeal to the Department of Insurance (CDI): If the employer is not satisfied with the insurer’s response to their complaint, they can file an appeal with their state’s Department of Insurance (e.g., the CDI in California). The Department of Insurance has established procedures for handling appeals related to classification code disputes. The appeal process may involve submitting documentation and evidence supporting the employer’s position and allowing the Department to investigate and make a determination.

Inquiry and Complaint to the Workers’ Compensation Insurance Rating Bureau (WCIRB): In some states, like California, the Workers’ Compensation Insurance Rating Bureau (WCIRB) plays a role in classification code decisions. If an employer disputes a classification decision made by the WCIRB directly, they can file a written inquiry with the WCIRB. If the inquiry is denied or not responded to within a specified timeframe (e.g., 90 days), the employer can then pursue a formal Complaint and Request for Action (CRFA) with the WCIRB. If the CRFA is rejected or not acted upon within a further timeframe (e.g., 30 days), the employer can then appeal to the Department of Insurance.

Documentation and Evidence: Throughout the dispute resolution process, it is crucial for employers to maintain thorough documentation and evidence to support their position. This may include detailed descriptions of their business operations, employee job duties, industry practices, and any other relevant information that justifies a different classification code. Referring to the “What Workers’ Compensation Issues does the CDI Handle?” section of this guide can provide additional information on the appeals process for classification and experience modification issues with the Department of Insurance.

Glossary

Understanding the terminology used in workers’ compensation is essential for both employers and employees. Here is a glossary of common terms:

• Agent: A licensed individual or organization authorized to sell and service insurance policies for an insurance company.
• Agreed Medical Evaluator (AME): A physician who may be selected by the parties, when an injured worker is represented by an attorney, to assess any disputed medical-legal issues.
• Binder: A short-term agreement that provides temporary insurance coverage until the policy can be issued or delivered.
• Broker: A licensed individual or organization who sells and services insurance policies on behalf of the insured employer.
• Broker-agent: A licensed individual who can act as an agent representing one or more insurers, and also as a broker dealing with one or more insurers representing the insured employer’s interests.
• Cancellation: The termination of an in-force insurance contract by either the insured or the insurer before its normal expiration date.
• Claim: Notice to an insurance company that a loss has occurred that may be covered under the terms and conditions of the policy.
• Claims Adjuster: In workers’ compensation, the person who evaluates and handles workers’ compensation claims and determines the amounts to be paid under the policy terms.
• Commercial Lines: Insurance coverages for businesses, commercial institutions, and professional organizations, as contrasted with personal insurance.
• Commission: A portion of the policy premium that is paid to an agent by the insurance company as compensation for the agent’s work.
• Conditions: The portion of an insurance contract that sets forth the rights and duties of the insured and the insurer.
• Consequential Bodily Injury: In workers’ compensation, special circumstances can arise when a work-related injury causes some sort of non-work-related injury.
• Coverage: Protection that is provided under an insurance policy.
• Declarations (DEC) Page: Usually the first page of an insurance policy that contains the full legal name of the insurance company, the policy number, effective and expiration dates, premium payable, the amount and types of coverage, and the deductibles, if any. May also be referred to as the Information Page.
• Deductible: The amount of the loss that the insured is responsible to pay before benefits from the insurance policy are payable.
• Dual Capacity: In workers’ compensation, an employer may be liable two ways to an employee who incurs bodily harm on the job as a result of using a product or service produced by that employer. The employee is eligible for workers’ compensation benefits and may also sue the employer because of the defectiveness of the injuring product or service.
• Earned Premium: The portion of the policy premium paid by an insured that applies to the expired portion of the policy and has been allocated to the insurance company’s loss experience, expenses, and profit year-to-date.
• Effective Date: The starting date of an insurance policy; the date the policy goes into force.
• Endorsement: “Endorsement” or “endorsement form” means a form, agreement or document that amends, adds to, subtracts from, supplements, or revises a policy form and is attached to a policy form to be effective.
• Exclusion: A contractual provision in an insurance policy that denies or restricts coverage for certain perils, persons, property, or locations.
• Experience Modification: A rating factor, which is expressed as a percentage, that is used to adjust the workers’ compensation premium of qualifying employers. An experience modification compares the loss or claims history of the insured employer to all other employers in the same industry that are similar in size. Generally, an experience modification of less than 100% reflects better-than-average experience, and an experience modification of more than 100% reflects worse-than-average experience.
• Expiration Date: The termination date of coverage as indicated on an insurance policy.
• First Party: The policyholder (insured) in an insurance contract.
• Flat Cancellation: Cancellation that takes place on the policy effective date. No premium charge is made; however, other charges (i.e., service) may apply.
• Fraud: An intentionally deceptive act committed to obtain an unfair or unlawful advantage. Fraud usually involves monetary gain.
• Frequency: The number of times a loss occurs.
• Hazard: A circumstance that increases the likelihood or potential severity of a loss.
• Indemnity: In a property and casualty contract, the objective is to restore an insured to the same financial position after the loss that the insured had prior to the loss. In the most basic sense, indemnity is compensation for a loss.
• Independent Adjuster: A person or organization that provides claims adjusting services to different insurers on a contract basis.
• Insurance: A method of shifting risk from a person, business, or organization to an insurance company in exchange for the payment of premium. The insurance company commits to be responsible for covered losses.
• Insured: The policyholder(s) entitled to coverage under an insurance policy.
• Insurer: The insurance company that issues insurance and agrees to pay for losses and provide covered benefits.
• Judgment Rating: A rating modification (either decrease or increase) that is based on the underwriter’s experience, best judgment, and analysis in classifying and underwriting a particular type of risk.
• Lapse: In property and casualty insurance, a lapse is the termination of a policy because of a failure to pay premium when due, or when an employer’s policy ends without the employer having new coverage to replace it.
• Liability Insurance: Coverage for a policyholder’s legal liability resulting from injuries to other persons or property damage.
• License: A certificate of authority issued by the CDI to an insurer, agent, broker, or broker-agent to transact insurance business.
• Limits of Insurance: The maximum amount of benefits the insurance company agrees to pay in the event of a loss.
• Managing General Agent (MGA): An agent contractually authorized by an insurance company to manage all or part of the insurer’s business activities. An MGA can manage the marketing, underwriting, policy issuance, premium collection, appointing and supervision of other agents, claims payments, and reinsurance negotiations of an insurance company.
• Material Misrepresentation: A factual falsification made in such a manner that the insurance company would have refused to insure the risk if the truth had been known at policy issuance.
• Misquote: An incorrect estimate of an insurance premium.
• Nonpayment of Premium: Failure by the policyholder to pay the premium on a policy or pay the installment premium payments due on a policy.
• Nonrenewal: The termination of an insurance policy on its normal expiration date.
• Occupational Accident: A work-related accident that injures an employee.
• Occupational Disease: An illness contracted as a result of employment-related exposures and conditions.
• Occupational Hazard: A condition in an occupation and surrounding work environment that increases the peril of accident, illness, or death.
• Occurrence: A liability insurance policy that covers claims arising out of occurrences that take place during the policy period, regardless of when the claim is filed.
• Personal Line: Insurance written on the personal and real property of an individual (or individuals) to include such policies as homeowners’ insurance and personal auto insurance, as contrasted with commercial lines.
• Policy: A contract that states the rights and duties of the insurance company and the insured.
• Premium: The monetary payment that an insured makes to an insurance company in exchange for the contract indemnifying the insured against potential loss. Simply put, this is the payment made by the insured to keep an insurance policy in effect.
• Producer: A term used by the insurance industry to refer to agents, brokers, broker-agents, and solicitors.
• Pro Rata Cancellation: A cancellation of a policy by an insurance company that returns the unearned premium to the policyholder (the portion of the premium for the remaining time period that the policy will not be in force).
• Provisions: The statement of policy conditions in an insurance policy.
• Qualified Medical Evaluator (QME): Appointed and regulated by the DWC’s Medical Unit, a QME assesses an injured worker’s permanent impairment and limitations and evaluates a wide variety of disputed medical-legal issues. Often, a QME performs a separate medical evaluation when the treating physician’s assessment is disputed.
• Quotation: An estimate of the cost of insurance based on the information supplied to the agent, broker, broker-agent, or the insurance company.
• Regulations: Requirements developed by a state agency, including the CDI, that implement laws passed by the legislature. Regulations go through a public comment process and must be approved by the state Office of Administrative Law.
• Reinstatement: The restoration of a lapsed or cancelled policy.
• Renewal: The continuation of an insurance policy (offer of renewal) into a new term from the same insurance company that issued the existing policy.
• Schedules for Rating Permanent Disabilities: The schedules that are used to determine the percentage of permanent disability of an injured worker.
• Schedule Rating: A method of pricing property and liability insurance. Schedule Rating uses debits and credits to modify a base rate figured by the special characteristics of the risk exposure. Insurers develop Schedule Rating because actuarial experience shows a direct relationship between certain physical characteristics and the possibility of loss. All schedule rating plans must be filed with the CDI.
• Second Party: The insurance company in an insurance contract.

Resources for Workers Compensation Information and Assistance

Navigating the workers’ compensation system can be complex. Here are resources to provide further information and assistance:

State Agencies:

• California Department of Industrial Relations Division of Labor Standards Enforcement:

  • Headquarters: 1515 Clay Street, Room 401, Oakland, CA 94612
  • Phone: 510-285-2118
  • Provides information and enforcement related to labor standards, including workers’ compensation insurance coverage requirements.

• Division of Workers’ Compensation (DWC):

  • Address: 1515 Clay Street, 17th Floor, Oakland, CA 94612
  • Mailing Address: PO Box 420603, San Francisco, CA 94142
  • Phone: 510-286-7100
  • The primary state agency for administering workers’ compensation in California. Provides information, assistance, and dispute resolution services.

• Division of Workers’ Compensation (DWC) – Information and Assistance Unit:

  • Phone: 800-736-7401
  • Offers guidance and support to injured workers and employers in understanding their rights and responsibilities and navigating the claims process.

• Division of Workers’ Compensation (DWC) – Uninsured Employers Benefits Trust Fund:

  • Los Angeles Claims Unit: 213-576-7300
  • Oakland Claims Unit: 510-286-7067
  • Provides benefits to employees injured while working for illegally uninsured employers.

• Division of Workers’ Compensation (DWC) – Subsequent Injuries Benefits Trust Fund:

  • Sacramento Unit: 916-928-4601
  • Offers additional compensation to workers with pre-existing disabilities who experience subsequent workplace injuries meeting specific criteria.

• Division of Workers’ Compensation (DWC) – Medical Unit:

  • Mailing Address: PO Box 71010, Oakland, CA 94612
  • Phone: 800-794-6900
  • Regulates Qualified Medical Evaluators (QMEs) and provides information related to medical aspects of workers’ compensation claims.

• California Department of Industrial Relations Office of Self Insurance Plans (OSIP):

  • Address: 11050 Olson Drive, Suite 230, Rancho Cordova, CA 95670
  • Phone: 916-464-7000
  • Fax: 916-464-7007
  • Provides information and oversight for employers seeking to self-insure their workers’ compensation obligations.

• California Department of Industrial Relations Workers’ Compensation Appeals Board:

  • Recorded information: 800-736-7401
  • Handles formal appeals and dispute resolution in workers’ compensation cases. Has multiple district offices and satellites throughout California.

Insurance Organizations:

• California Insurance Guarantee Association (CIGA):

  • Mailing Address: PO Box 29066, Glendale, CA 91209-9066
  • Phone: 818-844-4300
  • Provides a safety net for workers’ compensation claims in case of insurance company insolvency.

• State Compensation Insurance Fund (State Fund):

  • Mailing Address: P.O. Box 8192, Pleasanton, CA 94588
  • Phone: 888-782-8338
  • California’s state-operated workers’ compensation insurer, offering coverage to employers.

• Workers’ Compensation Insurance Rating Bureau (WCIRB):

  • Address: 1901 Harrison Street, 17th Floor, Oakland, CA 9612
  • Phone: 888-CA-WCIRB (888-229-2472)
  • Fax: 415-778-7272
  • Provides rating information, classification codes, and experience modification calculations for workers’ compensation insurance in California.

• Policyholder Ombudsman Workers’ Compensation Insurance Rating Bureau:

  • Address: 1901 Harrison Street, 17th Floor, Oakland CA 94612
  • Attn: Policyholder Ombudsman
  • Phone: 415.778.7159
  • Fax: 415.371.5288
  • Email: [email protected]
  • Twitter: @wcirbombud
  • Offers assistance to policyholders with questions or disputes related to classification, experience modification, and rating issues.

Filing a Complaint (Request for Assistance) with the California Department of Insurance (CDI):

• Consumer Assistance Hotline: 1-800-927-4357
• TTY: 1-800-482-4833
• Consumer Complaint Page: Consumer Complaint Page
  • The CDI Consumer Assistance Hotline and Complaint Page can assist with issues related to workers’ compensation insurance rating, underwriting, broker/agent conduct, and suspected fraud.
• Community Relations & Outreach: [email protected]
  • For ordering additional materials and resources from the CDI.

Conclusion

Workers’ compensation is a critical system designed to protect both employees and employers in the event of workplace injuries and illnesses. For employees, it provides a safety net, ensuring access to medical care and wage replacement when they are unable to work due to a job-related incident. This no-fault system simplifies the process of obtaining benefits, allowing employees to focus on recovery without the burden of proving negligence.

For employers, workers’ compensation is a legal responsibility and an essential component of risk management. By providing this coverage, employers create a more secure and supportive work environment, which can contribute to a healthier, more productive workforce. Understanding the intricacies of workers’ compensation, including the types of benefits, coverage requirements, and premium calculations, is crucial for employers to ensure compliance and manage their workers’ compensation program effectively.

Navigating the workers’ compensation system can sometimes be challenging, but numerous resources are available to provide guidance and assistance. State agencies like the Division of Workers’ Compensation and the Department of Insurance, along with organizations like the Workers’ Compensation Insurance Rating Bureau, offer valuable information and support for both employees and employers. By utilizing these resources and fostering a clear understanding of workers’ compensation principles, both employees and employers can contribute to a safer and more equitable workplace.