Curious about what workers’ compensation class codes are all about, how they’re used, and how to be sure your workers’ comp policy is using the right codes, and you’re not being overcharged?
In this video and post, I’m going to do a deep dive into workers’ compensation classification codes and explain what they are, how they’re used, and how to be sure you’re not being overcharged.
I’m also going to give you the biggest mistakes that business owners, like you, make when it comes to class codes so stick around to the end for that
So Workers’ Comp Classification Codes – should be a fairly simple and straightforward thing, but it’s not, and that can lead to confusion and costly mistakes. There are nearly 800 unique class codes in most states which adds to this complexity.
Fundamentally let’s start by answering the question
What is a workers’ compensation class code?
A classification code is a 4-digit identifier found in your state’s workers’ compensation insurance rating manual or in the NCCI rating manual also known as the SCOPES Manual.
It identifies the type of work predominately done at an employer’s location or where available the specific work performed by a group of employees.
A simple example is that 8810 is the class code assigned to Clerical Office Employees and describes a company or group of employees that perform clerical duties.
In each state, a rate is assigned to each class code which is used in the premium development of a policy.
So, if your policy gets the class code wrong you may be overcharged for your workers’ compensation insurance.
Are workers’ compensation class codes the same in all states?
Not necessarily. The majority of codes are similar but they do change from state to state based on each state’s filings.
The NCCI or National Council of Compensation Insurers standardizes the codes across 35 states, of the remaining states four are monopolistic – meaning that the state has total control over workers comp, and 11 states each has their own rating bureaus that formulate class codes and rates.
If you’re an employer with employees in multiple states the codes will be governed by the home state of those employees.
How are class codes assigned?
This is a great question that comes up often, especially with startups.
Generally speaking, when your workers’ compensation policy is first written as a new entity the agent or broker writing your policy will do their best to assign the right class codes to the policy and I’ll go into a bit more detail on this in a moment.
Then, when your policy term ends, you’ll have an audit performed to “true-up” the payrolls and here the audit department may try and add, subtract, or reclassify certain employees.
This is true when the agent first writing the policy didn’t follow the rules or guidelines or because of the auditor’s experience level, they believe they have the right codes to be used.
This question of how codes are assigned often comes up when changes are made and the employer isn’t happy with the changes – typically because it resulted in additional premiums.
And that leads me to my next point.
The business of the employer determines the class code and not necessarily the job tasks of the employees.
This is where most agents and brokers get it wrong.
We need to start with classifying the business operations first, which is known as the governing classification.
From there, separate job duties or classifications may – and I’d like to emphasize MAY be added to the policy if permitted.
Here’s an example. Let’s say you have a landscaping company. In New York, the class code for landscapers is 0042, this is your governing class.
Now some people may think okay, let me split off and find separate codes for hedge trimming, lawn mowing, and planting of flowers and shrubs.
Nope, doesn’t work that way. All the operations of the landscaper will fall into the governing class.
Now there are exceptions, the most common in this example would be clerical office workers.
These employees are assigned the code 8810 for clerical. There are other exceptions such as larger contractors that perform excavation or land clearing as an example which can be split off on their own code, but it does require some finesse to get this right, explained next.
So, how do you divide up class codes and payrolls for an employer?
There’s no simple answer to that question and this is where a skilled broker can step in to help unravel this sometimes confusing knot.
Through the use of state workers comp rating boards, the NCCI, and the experience of a good broker can help navigate through the issue of assigning codes and dividing up payrolls.
And, in my experience, once that research is done, I usually run it by the insurance company’s underwriters and audit departments to double-check my work so you’re not caught by surprise down the road at audit time or by the NCCI or the state Board who have the final say on code changes.
This may lead to the next question:
How do I know if the class codes in my workers’ comp policy are correct?
Again, this is probably not something the typical business owner can figure out on their own, and where a skilled broker can assist.
This goes back to working with the right broker who has the skills, knowledge, and tools to do the right research for you and to determine if the class codes in your policy are accurate.
In fact, when we’re working on a new workers comp policy we typically will “audit” the class codes and make sure they are accurate and look for potential ideas that might be better.
In recent years many states have adopted changes to the class codes removing older codes like Buggy Whip Manufacturer – I kid you not and adding in more modern codes around technology and new operations and risks not contemplated in the past.
How do you find workers comp rates by class code in your state?
This can also be a complex underwriting task for the average consumer.
I get it, sometimes you want to check out potential costs before making a bunch of calls so you’re prepared, or you’ve made calls and now you want to make sure you’re getting a good deal.
What makes this complex is that in many states the rating structure is composed of two elements:
The first is known as loss cost rates, which are also called base rates. In most states, the base rates or loss costs for each class code are published by the state and used by all insurers. But this is not the final rate.
The second component of the rates is loss cost multipliers known as LCMs. These are factors applied to the loss cost rates and each insurer has its own LCMs and these are not always published. On top of that, big insurers may have 5 to 12 versions of the LCMs based on different underwriting tiers and their underwriting appetites further complicating the goal of finding out what rates are by each class code.
In my opinion, the only way to get an accurate quote is to have a skilled broker submit your account to the right underwriters for a firm quote, or ask them for a ballpark idea if that will suffice.
How do Class Codes Impact the Cost of Workers Comp Insurance?
As I’ve mentioned previously each class code in the workers’ compensation manual is assigned a rate – whether that’s a loss cost or final rate doesn’t matter.
What matters is that if you get the class code wrong for some or all of your employees, you may be dramatically overpaying for workers’ compensation.
Here’s the bottom line – if you’re looking for a team of dedicated experts to work with on your business insurance – or the type described in this post – I’d love the opportunity to speak with you and see if we’re a good fit for you and your business.
So what mistakes happen with class codes?
In my experience here are two of the big mistakes business owners make relative to class codes.
The first is that a business owner decides to buy workers’ comp directly online without the help of a broker.
They sort of know how the system works and they try and rig the system to get a lower rate or premium and they intentionally or accidentally misclassify the policy they’re buying.
Yea, they get a lower premium, but that’s only going to last until they get caught during an audit, and in cases like this, insurers can go back three years and charge the appropriate class rate and bill the insured in one chunk.
And in some states, penalties can be assessed on top of that! That’s not great.
The second biggest mistake is thinking that sub-contractors all have the right workers comp insurance.
What I mean by that is that a small sub-contractor has a workers comp policy covering his clerical employee, but excludes the owners which are permissible in many states.
The business owner submits the sub’s certificate at their audit to the auditor and finds out that only the clerical class code is being deployed on the say carpenter’s policy and now is charged the full cost of the sub’s work in the high-cost carpenter rate class
The third mistake I’ve seen pretty often is the business owner goes online to buy a policy and accepts the results of the online portal’s suggestion for class code, not knowing that another code would legitimately work and cost less.
This is where the complexity of the class code system can trip up someone.
What’s the solution to these mistakes and others?
It’s going to sound self-serving, but in my opinion, it makes sense to work with an expert broker on not only your workers’ comp but all your business policies.
Why go it alone?
In most cases, you’re not saving any money when you go it alone and buy insurance online, and prone to making costly mistakes.
Working with a skilled broker can help you avoid these costly mistakes and get you the right coverage at the right price. You get the peace of mind you’re looking for and you’re avoiding problems down the road.