In 2023, the construction industry reported more than 162,000 injuries and 986 fatalities to the U.S. Bureau of Labor. Even when contractors work diligently to keep their crews safe, work injuries can still occur. Fortunately, workers’ compensation insurance reduces the financial fallout for workers and businesses when work-related incidents occur. Workers’ compensation can pay for medical expenses, lost wages and employer liability. In worst-case scenarios, it can cover death benefits and disability.
Understanding what affects workers’ compensation insurance rates can help contractors make informed decisions about how they communicate with their insurance agent, what they should expect from their insurance company and how they can manage their insurance costs.
STATE RATES AND GOVERNMENT REQUIREMENTS
State workers’ compensation rating bureaus set the base rates and requirements for businesses in their respective states. Rates vary from state to state and impact the workers’ compensation premium businesses must pay.
Actionable Items: These rates and requirements are mostly out of a company’s control. Following state requirements can help ensure employees are protected and contractors are not at risk of fines, penalties or criminal charges. If work is conducted in multiple states, an independent insurance agent can help ensure compliance with all state requirements.
NATURE OF WORK AND BUSINESS CLASSIFICATION
The type of work performed by a contractor is one of the primary determinants of insurance premiums. Jobs that involve higher levels of risk typically carry higher premiums than less hazardous work—a roofing contractor naturally faces higher risks of falls and injuries than an office worker, resulting in higher premiums to offset the increased likelihood and severity of potential claims.
Actionable Items: Employee classifications directly impact insurance premiums. Make sure the nature of the work is accurately described. If a contractor is expanding into a different type of work or offering new services, the insurance company will need to reflect that change on their policy. This change could lead to an increase or decrease in premium costs. When considering new operations, insurance premium changes should be budgeted to make an informed financial decision.
PAYROLL CONSIDERATIONS
Payroll is an important factor in the calculation of workers’ compensation premiums. Payroll includes wages, bonuses, overtime, paid time off and other compensation employees receive. Workers’ compensation insurance pays for medical bills and covers a portion of wages while an employee cannot work. Using payroll in the calculation accounts for risk based on hours worked and scales with compensation for the cost incurred to pay a worker for time lost due to illness or injury.
Actionable Items: Regularly review and update payroll estimates to account for changes in workforce size, employee wages or seasonal fluctuations in business activity. Reporting significant changes can help prevent underpaying or overpaying premiums, ensure compliance with insurance requirements and avoid potential surprises during audits. Some insurance companies offer a monthly reporting option to help manage costs by basing premiums on the most recent payroll.
PAST LOSS HISTORY
Claim history significantly influences premiums. Insurers assess the frequency and severity of past claims to help predict future risks and determine appropriate premium rates. A history of frequent or costly claims suggests higher risk and may result in higher premiums to offset potential liabilities. A business’ experience modification rate is an important factor. Rating bureaus calculate EMR based on historical premium and loss experience compared with the industry average. The eligibility criteria to receive an experience modification varies by state.
Actionable Items: Select a carrier that helps reduce claims-incurred cost. One program to check for is a nurse helpline that streamlines access to non-emergency care for injured workers. Choosing the right type of care for injuries can reduce overall claim costs. Another program to look for is an automatic medical bill review process, which is provided by some insurance companies. These reviews verify that charges are related to the applicable injury and are billed correctly, which helps keep costs down. Another service to look for is a return-to-work program to help get employees back to work sooner. It’s also important to check whether an insurance company charges to use their programs. Some companies will provide these programs and services but charge them back as incurred-claims costs; some do not charge for these services at all, while other companies do.
PRICE FLEXIBILITY
In some states, insurance carriers can sophisticate their rates beyond what the rating bureau suggests. In states where this is possible, workers’ compensation premiums may differ from one carrier to the next. However, other states do not allow for additional rating sophistication, so workers’ compensation premiums will be the same, regardless of the carrier. Safety is a top consideration in determining pricing in states where premiums vary.
Actionable Items: Working with a knowledgeable independent agent is a great place to start. An agent will know which questions to ask and which documentation to collect before presenting a business to underwriting. Showing that safety is taken seriously through documented programs can earn an edge on pricing. For example, providing high-quality personal protective equipment to employees, hiring more full-time employees than subcontractors or temporary laborers, or performing daily toolbox talks can show a commitment to safety. Insurance companies also may have a loss-control team to help with safety. Following through with loss-prevention recommendations can improve pricing on renewals.
Premium factors, such as the type of work, business location and employee payroll, are relatively static. However, a proactive approach to risk management and a dedication to safety can help keep insurance costs down.
By working with an independent insurance agent and an insurer that’s dedicated to risk management and safety, contractors can better navigate the complexities of risk management before, during and after incidents and have peace of mind they have the workers’ compensation policy that best suits their unique needs.
