(December 2020)
Classifying workers compensation risks can be extremely challenging, especially considering that they often do not match general liability classifications. In many cases, the classification descriptions and codes are only vaguely related to one another or are not related at all. As a result, classifying workers compensation risks can be difficult and challenging, so it must be done carefully. Proper classification produces the best exposure fit and benefits both the named insured and the insurance company.
Classifying is defined as arranging or organizing by class or category. This is the way related exposures are grouped for insurance purposes. In workers compensation, the group is employees, and the exposures are the hazards related to the jobs the employees in the group perform.
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Example: Perfection Printing is a printing firm and has several distinct and different groups of employees, based on the jobs they do. In addition to employees directly engaged in printing operations, Perfection also has clerks, warehouse workers, sales representatives, accountants, and maintenance personnel. |
Workers compensation classifications are usually based on the business' overall operations and assume that all similar operations have the same basic groups of employees. These are referred to as standard classifications.
However, it is important
to read the explanation of the standard classification to understand what is
included and what is not.
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Example: Referring back to the Perfection example above, all printers have employees engaged in printing, warehousing, and other operations. Perfection's classification is, therefore, Class Code 4299–Printing and all remuneration would be assigned to that class. The manual explains what operations are considered standard and included within the classification. It also explains what operations are not considered standard. The remuneration of the nonstandard operations must be removed and assigned to another classification. |
The operation that produces most of the payroll is usually treated as the principal business and determines the governing classification. This general guideline has exceptions in certain cases.
Many businesses have exceptions to the standard classifications, and those employees must be rated separately. Clerical workers, outside salespersons, and drivers are common examples of employees usually rated using the classification’s specific exception. However, some standard classifications specifically include them.
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Example: The printing operation in
the Perfection example above includes printing as the principal business and
governing classification. It explains what operations it includes and then
specifically states that Class Code 8810–Clerical employees and class Code
8742–Salespersons (outside) operations must be rated separately. |
The National Council on Compensation Insurance, Inc. (NCCI) has identified several operations that do not require separate rating.
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Example: Quentin's Quarries is a large limestone mining business that operates a cafeteria for the convenience of its employees. Quentin's workers compensation policy must classify and rate the cafeteria exposure separately. |
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Examples:
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Example: Mike's Machinery Manufacturing also produces an instruction manual and user guide for the products it makes. The governing classification includes the payroll for the employees who print this material. |
Three different circumstances will stop the inclusion of certain operations within the governing classification.
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Example: Class Code 1803–Stonecutting or Polishing NOC & Drivers has an exception. It requires quarrying or mining to be rated separately using Class Code 1624–Quarry NOC & Drivers. |
While general Inclusions are common operations that are usually included within a classification, other operations must always be rated separately, regardless of the governing classification, unless the classification description specifically states that they are to be included and these are called General Exclusions. The reason they are classified separately is that the process is unique, or it represents a significant exposure to loss, regardless of whether it is incidental or not. Some operations generally excluded are aircraft operations (including all flying and ground crews), new construction or alterations, stevedoring, sawmill operations, and day care services the employer operates.
Selecting the proper classification or classifications is not always simple or easy. The primary goal in classifying risks is to select the one class that best represents the operation. Classification wording must be read carefully with respect to inclusions and exclusions. There is not usually a single classification that exactly matches a given operation. As a result, the classification that best or most nearly reflects it should be used.
This "one best classification" approach has a few exceptions. These include construction or erection operations, farming, repair facilities, and retail businesses. These risks almost always have more than one classification, depending on the nature and extent of the business and the operations performed.
Employees who do more than one job (or who even work for more than one entity) may have their payroll split. However, splits are permitted only if the named insured keeps accurate payroll records that exactly reflect the separate amounts of pay such employees receive for each job. Their entire payroll defaults to the highest rated classification if the named insured does not keep such detailed records.
A few classifications cannot be split, regardless of how sophisticated the payroll records are. This includes outside salespersons, collectors, outside messengers, and office employees where the highest rated classification must be used.
Note: It is important that when payroll splits are used that the named insured is able to provide this information consistently in a manner that auditor can follow or else the insured may have a significant audit owed premium.
One area of concern is the way to handle the exposures of one entity if the same workers compensation and employers liability insurance policy includes all combinable entities. The simple answer is that each entity must have at least one classification. An example is the person who owns the building the business occupies in one name and operates the business under another. In this case, both entities can be combined and may be named and included in the same workers compensation policy. However, two classifications must be used (because there are two entities), and each classification selected must reflect the operation it applies to as closely as possible.
Payroll of some employees is disproportionate to the actual workers compensation exposure. An example is an officer or executive of the business. In these cases, the payroll may be limited for premium calculation purposes. The limitation usually reflects a minimum and maximum payroll range for each week worked, including partial weeks. These minimums and maximum are set at the state level.
The classification section of the NCCI Basic Manual for Workers Compensation and Employers Liability Insurance is an excellent underwriting tool. Another is the Scopes of Basic Manual Classifications. The classifications sections of these manuals, as well as those of other available manuals and services, provide information and guidance about the types of exposures present in most operations. For example, the description in Scopes for Class Code 7380–Drivers, Chauffeurs, Messengers, and Their Helpers NOC–Commercial thoroughly explains the exposure. It explains in detail what is included as well as what is not and also suggests exposures for which another code is (or may be) more appropriate.
Carefully reading the classification description provides significant underwriting information on the exposures included and most common to that type of operation. Operations that require separate classification and rating are usually the ones that are not necessarily in every operation but appear often enough to be mentioned. These references provide clues for areas that agents and underwriters need to evaluate thoroughly. Overall, the classification section of these manuals is a valuable tool to use in risk analysis and underwriting. However, underwriting goes far beyond this.
Classifying employees is usually a fairly direct process but interesting issues can arise. For example:
This may be the most important underwriting factor because past loss history is a good predictor of future loss activity.
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Example: Jessica’s Inks has been insured with the same insurance company for five years. Scenario 1: The business is loss free. It can be expected that losses will be minimal unless there is a change of management or in operations. Scenario 2: The business averages two minor losses per year. It can be expected that this same pattern will continue. The type of loss might also indicate the possibility that more significant losses could occur in the future due to lax oversight. Scenario 3: The business had a significant loss in year three but no other losses The large loss was due to a major car accident where the employee was not at fault. The expectation should be that losses in the future will be minimal. |
Patterns of losses, such as falls from heights, suggest loss control issues that have not been addressed. Some types of losses, such as repetitive motion claims, rarely occur once and suggest a need for intervening loss control methods.
Risks with clean loss histories are attractive, but consideration must be given to what they will do if they do have a loss. There should be a management commitment to do what is right in all cases and have a written procedure for what to do if there is an injury. These risks also tend to be attractive and the pricing on them competitive, sometimes to the point that there is no chance to be profitable if a loss does occur.
On the other hand, risks with significant loss activity (both small and large) should not necessarily be dismissed. It is important to review how management has reacted to the losses and changes that have been in place. These risks tend to have debit experience modifications and are not subject to significant competition. As a result, there may be an opportunity to work with management to make risk improvements while "riding the high mod" down.
The state where work is done is important. Benefits vary significantly by state as do rates. Each company must decide the state(s) where it wants to operate. Some companies may limit writing certain types of risk within a specific state because of its laws and statutes.
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Example: The recent legalization of
recreational marijuana use is causing many companies to refuse to provide
coverage for businesses with any work in one of those states. |
Understanding a business’ operations is vital. Its assigned classification is general, and the rate provided is an average for all operations within the classification. The particular risk’s exposures must be evaluated to determine if it is more or less hazardous than others within the classification. For example, the loss potential for an electrician who works inside residential buildings may be less than an electrician who works inside manufacturing plants.
A business that is growing is a positive underwriting characteristic. However, rapid growth can also be a concern because the increased activity may overwhelm loss control activities, result in insufficient training, and lead to accidents. On the other hand, growth can be managed and some of the following actions are recommended in conjunction with it:
On the other hand, a risk that is shrinking poses other concerns. The first cutback is often to loss control efforts followed by layoffs. Increases in productivity forced on the reduced labor force may result in encouraging bypassing guards and other safety devices. In addition, workers may be more willing to report losses.
The best risks are steadily growing operations that have a strong commitment to safety.
There are none. However, there are certain general characteristics that most good risks share.
There are unlimited underwriting considerations for workers compensation. Each risk is different, and a consideration that may be significant for one risk is minor or may not even apply to another. The most important underwriting activity is to go beyond surface issues presented in applications, loss runs, and various other documents and dig deeply enough into the risk to truly understand what it does.