14 Workers Compensation Insurance OVERVIEW Under Workers Compensation laws, benefits must be paid for on-the-job injuries, regardless of negligence on anyone s part. This means that even if the employee is injured through his/her own negligence, he/she is entitled to benefits. Because Workers Compensation insurance is an exclusive remedy program, it supersedes the right of the injured employee to sue for damages. In addition to providing for payment of benefits to employees as prescribed by law, Workers Compensation policies provide Employers Liability Coverage to the employer for employees bodily injury claims that do not fall within the scope of Workers Compensation laws. Upon the completion of this chapter, you will be able to: Differentiate between Compulsory versus Elective types of employment laws Recognize Employment Conditions in Workers Compensation Insurance Identify benefits provided by the Workers Compensation Policy Define the Second Injury Fund Explain how the Workers Compensation and Employers Liability Insurance Policy works Recognize the primary coverages of the Workers Compensation Policy 14.1 Types of Laws Compulsory Coverage Employers are required by law to provide Workers Compensation benefits to their employees by purchasing Workers Compensation from the State Compensation Insurance Fund or any other admitted insurer offering coverage. Employers who can demonstrate the financial capacity to manage Workers Compensation claims without insurance must first obtain a Certificate of Self-Insurance from the Department of Industrial Relations in order to be self-insured. Exclusive Remedy Exclusive remedy means that the employer assumes absolute liability for injuries to the employee. Under Workers Compensation, if the employee is injured, the employee may not: Collect benefits and then sue the employer for negligence or liability Refuse to accept compensation benefits in order to sue the employer for a larger award Covered Insured The purpose of this is insurance is to protect the employer regarding legal obligations arising out of a work related loss of a covered employee. The insured under this policy is the employer, who may be an individual (sole proprietor), partnership, corporation, or other legal entity. The employer is responsible for paying the premium. Injured employees are entitled to the benefits, but are not considered insureds as the policy is purchased and designed to protect the liability of the employer. 170 A.D.Banker&Company
WORKERS COMPENSATION INSURANCE Employment Covered Since Workers Compensation is a relationship between the employee and the employer, Workers Compensation insurance is usually required if the employer: Retains the right to direct the way work shall be completed Supplies the necessary equipment and tools to complete the work Determines the work hours and location Determines the end results of the work to be completed Controls the frequency and timing of compensation for work By contrast, a worker is an independent contractor if he/she determines how work is conducted and compensated, and supplies his or her own equipment. Independent contractors are not eligible for Workers Compensation, and must purchase their own liability insurance. In California, residence (domestic) employees are required to be covered by endorsement on a homeowners policy if they: Were employed for at least 90 days immediately before the injury occurred Worked at least 52 hours; and Earned a minimum of $100 Agricultural and farm laborers are also required to be covered under the California Workers Compensation Act. Retention Question 1 In California, Workers Compensation is available through: a. Private insurers only b. The State Fund only c. Both private insurers and the State Fund d. Neither private insurers nor the State Fund Retention Question 2 Which principle prevents an injured worker for suing for a larger award than would be paid through a Workers Compensation claim? a. Assumption of Risk b. Exclusive Remedy c. Contributory Negligence d. Comparative Negligence Retention Question 3 Which of the following is not a criterion for distinguishing an employee from an independent contractor? a. Supplying the necessary equipment and tools to complete the work b. Retaining the right to direct the way work shall be completed c. Number of hours worked d. Controlling the frequency and timing of compensation for work A.D.Banker&Company 171
CHAPTER FOURTEEN 14.2 Covered Injuries Covered injuries are those that arise out of, and in the course of, employment. This means: The injury must occur while the employee is at work or working The injury must arise from a risk that is reasonably related to employment Take Note The employer can deny benefits to an employee who intentionally injures himself/herself or if injury results from intoxication (unless the intoxicant was furnished by or consumed with the knowledge or consent of the employer). Occupational Disease An occupational disease must arise out of the course of employment and must be caused by conditions that are particular to that employment. Example An employee who contracts a cold in the winter may not be eligible for benefits because the cold could have been contracted while the employee was not working. However, a coal miner who develops respiratory problems may likely be eligible for benefits. Retention Question 4 Which of the following would be a covered injury? a. An injury sustained because of the employee s own negligence b. An injury sustained during hours that were not designated for work c. An injury sustained while intoxicated d. An injury sustained intentionally 14.3 Benefits Provided Medical Benefits California provides unlimited coverage for all necessary medical (including hospital) expenses related to a covered injury or illness without time or dollar limitations. Take Note In California, an employee is entitled to no more than 24 chiropractic and 24 physical therapy visits per industrial injury. 172 A.D.Banker&Company
WORKERS COMPENSATION INSURANCE Disability Income Benefits Disability benefits compensate for the reduced ability to work arising out of a covered injury. There are 4 types of disability. Temporary Total Temporary total disability describes an injury from which an employee is expected to recover and return to work, but which prevents the employee from doing any work while recovering. Benefits begin after a waiting period of 3 days or immediately if the employee was hospitalized for one or more days. Retroactive benefits will later be paid back to the initial date of disability if the disability lasts beyond 14 days. The benefit amount is 66-2/3% of the employee s weekly wage, subject to both a minimum and maximum benefit based on the statewide average weekly wage. Permanent Total Permanent total disability describes an injury that prevents an employee from being able to do any work for the rest of his/her life. Benefits are subject to the same weekly benefit percentage and the same minimum and maximum limits as Temporary Total. Benefits are paid for life. Temporary Partial Temporary partial disability describes an injury that allows an employee to do some work, but prevents him/her from performing his/her regular duties until full recovery. Benefits are usually calculated as a percentage of the difference in the wages. Permanent Partial Permanent partial disability describes an injury with which an employee is able to do some work, but will never fully recover. An employee can still earn a wage, but not as much as he/she would have earned if the injury would not have occurred. Rehabilitation Benefits Physical therapy and vocational training are utilized with the objective of returning the injured employee back to work as soon as possible. These benefits are usually paid by the insurer, though some states have set up special state funds to pay for rehabilitation costs that are funded by taxes levied against insurers and self-insureds. Death and Survivor Benefits (Funeral Expense Benefit) Survivor income benefits are a percentage of the deceased worker s wages and are also provided to the surviving spouse and any dependent children. Supplemental Job Displacement Service Benefit For those whose disability prohibits them from returning to their usual job, this benefit provides compensation after the end of a temporary disability. A disabled employee becomes eligible for this benefit if he/she has not returned to work within 60 days of the last disability payment. The benefit is a non-transferrable voucher that can be used to pay for retraining, skill enhancement, or both. The voucher amount is between $4,000 and $10,000 depending upon the percentage of permanent disability. No more than 10% of the amount may be used for counseling. A.D.Banker&Company 173
CHAPTER FOURTEEN Retention Question 5 Temporary total benefits are subject to a waiting period of how many days? a. 1 b. 3 c. 14 d. 21 Retention Question 6 Which type of injury prevents an employee from being able to do any work for the rest of his/her life? a. Temporary partial b. Temporary total c. Permanent partial d. Permanent total Retention Question 7 In California, which of the following Workers Compensation coverages pays unlimited benefits? a. Disability b. Medical c. Rehabilitation d. Survivor s benefits 14.4 Second Injury Fund The Second Injury Fund pays compensation to an employee who has already suffered a prior disabling injury, and now sustains a subsequent injury, when the combination of the two injuries creates a greater disability than the second injury would have created by itself. The employer is responsible only for that compensation that would have been paid had the second injury occurred without the existence of the prior injury, and the fund pays the difference. This fund is designed to encourage employers to hire people with disabilities by limiting employers liability for subsequent injuries. 14.5 Federal Workers Compensation Laws State Workers Compensation programs do not apply to all employees. Some types of workers are covered by federal laws which preclude coverage at the state level. The Federal Employers Liability Act applies to interstate railroad workers. The U.S. Longshore and Harbor Workers Compensation Act applies to workers who load, unload, build, or repair ships (but not to the crew of the ship). The Jones Act applies to the crews of ocean vessels. The Federal Employees Compensation Act applies to all U.S. civilian Federal employees. The Defense Base Act applies to workers on military bases outside the United States. 174 A.D.Banker&Company
14.6 Employers Liability Insurance WORKERS COMPENSATION INSURANCE Employers Liability insurance covers the gap between the Workers Compensation policy and the General Liability policy. Its provisions include coverage for: Injuries sustained by non-employees that arise out of covered employment A spouse s loss of consortium Damages under the Doctrine of Dual Capacity, which applies when an employee is injured by a product the employer manufactures Consequential bodily injury (when another party suffers injury resulting from the employee s injury) Exclusions Liability assumed under a contract Punitive damages awarded because an employee was employed in violation of law Bodily injury to an employee while employed in violation of law Any obligation imposed by any Workers Compensation, Occupational Disease, Unemployment Compensation, or Disability Benefits law Bodily injury intentionally caused by the insured Bodily injury caused outside of the United States, its territories and possessions, or Canada (injury to a resident temporarily outside of these areas would be covered) Damages arising out of coercion, criticism, defamation, evaluation, reassignment, discipline, harassment, humiliation, or termination of or discrimination against any employee, as well as arising from any personnel practices, policies, acts, or omissions Bodily injury arising from work that falls under federal jurisdiction Fines or penalties imposed for a violation of federal or state law Damages payable under the Migrant and Seasonal Agricultural Worker Protection Act Limits of Liability The minimum limits are $100,000 per accident for injuries, $100,000 per employee for disease, and $500,000 aggregate for disease. Retention Question 8 The type of insurance that bridges the gap between Workers Compensation coverage and the CGL is: a. The Second Injury Fund b. Employers Liability c. Professional Liability d. Errors and Omissions A.D.Banker&Company 175
CHAPTER FOURTEEN 14.7 Other States Insurance This coverage applies only if more than one state is shown in the Policy Territory. If the insured begins work in a state listed in the Information Page after the effective date of the policy, the insurance will apply if other insurance does not exist. The insurer will reimburse the insured for any payments made where insurance applies and the insurer is not allowed to pay directly. The insured must notify the insurer within 30 days when entering a state not listed in the Information Page. Selected Endorsements Voluntary Compensation Endorsement This endorsement is used when an employer wishes to provide Workers Compensation benefits to employees even though the law does not require the employer to provide coverage. The following information must be provided in the endorsement: The class of employees to be covered The state of employment The designated state s Workers Compensation Law Foreign Coverage Endorsement This endorsement makes the coverage under a Workers Compensation Policy around-theclock, continuous coverage for those employed in foreign operations or endeavors. It covers locally prevalent diseases to an area as an occupational disease, and includes the option to buy coverage for the additional amount necessary to return the employee to the United States. 14.8 Workers Compensation Rating Manual Rating (Job Classification) Under this rating method, the rates for Workers Compensation are based upon job (work) classifications. Each job classification has a corresponding manual rate. Rates are higher for higher-risk occupations. Basic premiums are determined by multiplying the manual rate for each job classification by each $100 of payroll for that job classification. A new employee will be under the classification that describes the risk. The main purpose is to categorize employees according to their common exposures. Experience Rating This rating method is used to encourage employers to decrease the frequency and severity of accidents by basing premium on the prior loss experience of the employer. Example If the employer s experience is.90, the premium charged will be 10% lower than the manual rate. If the experience is 1.25, a surcharge of 25% over the manual rate will apply. In this example, the.90 and 1.25 are known as experience modification factors. Premium Discount This rating method takes into account the fact that certain expenses included in the premium rate are fixed and do not increase as the size of the risk increases. Therefore, larger risks receive a discount as credit for those expenses that do not increase proportionately with the risk. 176 A.D.Banker&Company
WORKERS COMPENSATION INSURANCE Participating Plans (Dividend) Under this rating method, the insured is eligible for a premium refund (dividend) if the experience over the policy period falls within the guideline established by the insurer. This provides for effective insurance based upon the current policy period. Retrospective Rating This rating method establishes rates in which the current year s premium is calculated to reflect the actual current year s loss experience. An initial premium is charged and then adjusted at the end of the policy period to reflect the actual loss experiences of the business. California Rating System California s Workers Compensation experience rating system is a merit rating system intended to provide employers a direct financial incentive to reduce work-related accidents. The experience rating system objectively distributes the cost of workers compensation insurance more equitably among employers assigned to particular industry classifications. Not all employers are eligible for experience rating. For those who qualify, experience rating is mandatory. Insurers are allowed open competition premium determination as long as they notify the Department of Insurance of these rates; with this system the Insurers generally charge what they wish without prior approval. Independent Rating Organizations Any rating organization must apply for and acquire a license from the Commissioner before being allowed to operate in California. The California Workers Compensation Inspection Rating Bureau is a nonprofit rating organization comprised of all companies licensed to transact workers compensation in California. Rating organizations are maintained in this state to: Provide reliable statistics and rating information with respect to workers compensation and employer s liability insurance Collect and tabulate information and statistics for the purpose of developing pure premium rates to be submitted to the Commissioner for issuance and approval Inspect risks for classification or rate purposes and to furnish to the insurer and, upon request of the employer, to the employer full information concerning the rates applicable to the employer s insurance Many states have their own rating bureaus and there are national rating organizations, such as the National Council on Compensation Insurance and the American Cooperative Council on Compensation Technology. Retention Question 9 Which type of rating system categorizes employees according to their statistically common risk exposures? a. Manual Rating b. Experience Rating c. Premium Discount d. Retrospective Rating A.D.Banker&Company 177
CHAPTER FOURTEEN 14.9 Other Sources of Coverage State Compensation Insurance Fund (SCIF) California has established State Insurance Funds as an alternative for an employer to purchase Workers Compensation Insurance. The fund operates as a public insurer that competes with private insurers in the class of Workers Compensation Insurance, and issues a policy similar to those issued by private insurers conforming to the Workers Compensation laws of the state. In California, this fund is known as the State Compensation Insurance Fund (called State Fund for short). Employers who are unable to purchase coverage in the voluntary market may purchase coverage directly from the fund and they cannot be declined by it. Licensed brokers may also place business through the fund. Self-Insurance Plans and Employer Groups California allows employers to self-insure upon satisfying certain statutory requirements that are a guarantee of their ability to meet their obligations. Large employers are sometimes attracted to selfinsurance plans because losses can be predictable and benefits are capped by statute. 14.10 24-Hour Care Coverage In the State of California, an Accident and Health Agent or a Property and Casualty Broker-Agent are authorized to transact 24-Hour Care Coverage. 24-Hour Care Coverage is defined as the joint issuance of a Workers Compensation Policy with a Disability Insurance Policy, health service plan contract, or other medical insurance coverage for nonoccupational injuries and illnesses. This product cannot include a Life Insurance Policy. The main feature of 24-Hour Care Coverage is to lower the cost of Workers Compensation and health insurance coverage for employers in California. This is accomplished through insurers combining their claim database for both types of coverage, and causing the same sort of cost control common on the nonoccupational side to also be utilized in Workers Compensation. Combining the coverage also allows more managed care programs to be used for Workers Compensation. The Accident and Health Agent who sells 24-Hour Care Coverage is required to obtain four hours of continuing education credits on Workers Compensation Insurance. Instruction of the coverage must be included in the prelicensing course curriculum. Retention Question 10 Which of the following statements about Workers Compensation in California is true? a. California does not allow employers to self-insure b. California is a voluntary Workers Compensation state c. The State Fund functions as a public insurer competing with private insurers in the Workers Compensation market d. 24-Hour Coverage is illegal in California 178 A.D.Banker&Company