Class Code Verification is a process by which specific information is reviewed to determine the appropriate class code assignment. It sounds easy enough, however simple oversights and misinterpretations can result in the failure to accurately apply the correct class code to a particular job resulting in erroneous bids, premium adjustments, false experience MOD promulgation, reinsurance exclusions, insurance cancellations, non-renewals, or denials.
The National Council on Compensation Insurance (NCCI) publishes a Scopes Manual listing all workers’ compensation codes as an aid to classifying specific jobs. However, state exceptions, exclusions, operations covered or not covered, scope, and addendums can be easily be overlooked. It can take years to develop a keen understanding and working knowledge of the Scopes Manual.
Temporary Staffing companies succeed or fail based on effectively managing their workers’ compensation mechanism. Their profit margins are directly tied to their workers’ compensation premiums. Verifying and applying the correct class code to temporary placements is critical to projecting accurate workers’ compensation premiums.
Temporary Staffing companies base their markups on the cost burden developed by certain factors including pay rates, state and federal taxes, employee benefit costs, and the workers’ compensation class code rates associated with positon being supplied to their client. Take for instance a warehouse employee being placed with a retail clothing store in Florida. Should this position be classified as 8018 with a $3.65 (2015 FL) rate or as 8008 with a $1.96 (2015 FL) rate?
There is a 54% difference in these rates. Let’s assume that 10 full time employees were being placed with the client at $12.00/Per Hour rate resulting in a gross annual payroll of $249,600. If class code 8018 were used, the workers’ compensation manual premium expense would be $9,110.40 and if class code 8008 were used, the resulting manual premium would be $4,892.16.
The insurance carrier has the right and obligation to correct misclassifications and apply the correct rate when they are discovered. Most misclassifications are discovered by the workers’ compensation auditor during the final audit process. However, discoveries can be made by underwriters, adjusters, NCCI inspectors, and even competing agents.
An adjustment means that a misclassification is corrected and the applicable rate is factored against the associated payrolls. In some states, insurance carriers can retroactively apply corrections going back 3 years. Whether the reclassification results in a return of premium or an additional premium, it is predicated on an error made in the initial classification. Misclassifications can result in losing bids to your competitors or unexpected shrinkage of profit margins as a result of applying incorrect rates to your burdens.
Misclassifications can also adversely affect the accurate promulgation of experience modification factors. Loss ratios are skewed by incorrect premiums and claims are skewed by applying incorrect class code ELR & D Ratios resulting in erroneous experience mods.
Insurance carrier underwriters tend to decline offering quotes when misclassifications are discovered during the underwriting process. They do this because the information submitted is unreliable. The premiums, loss ratios, and experience modification factors are all in question and cannot be relied upon to generate a true understanding of the exposures.