Workers’ compensation, often referred to as “workers’ comp,” is a crucial safety net designed to protect employees who experience job-related injuries or illnesses. Born from the rise of the trade union movement in the early 20th century, workers’ comp addresses the historical lack of protection for workers facing hazardous conditions. It stands as the oldest form of social insurance in the United States, predating both social security and unemployment benefits. Understanding How Does Workers Comp Work is essential for both employers and employees to navigate workplace safety and financial security effectively.
This guide delves into the intricacies of workers’ compensation, particularly focusing on the system in place in California, a state that adopted these laws as early as the 1910s. Built on a “no-fault” system, California workers’ compensation ensures that employees can receive benefits without needing to prove negligence for their work-related injury or illness. This article will explore the benefits available, how coverage is structured, employer responsibilities, and answer frequently asked questions to provide a comprehensive understanding of how workers comp work.
Understanding Workers’ Compensation Benefits
Workers’ compensation policies are structured to provide a range of benefits to employees injured on the job. The specific benefits an injured worker receives depend on the nature and circumstances of their injury or illness. These benefits are designed to support employees through recovery and, where necessary, provide long-term assistance. The five primary types of workers’ compensation benefits are:
Types of Workers’ Compensation Benefits
Medical Care
A cornerstone of workers’ compensation is providing comprehensive medical care. Injured employees are entitled to receive all medical treatment reasonably necessary to cure or relieve the effects of a work-related injury or illness. This broad coverage encompasses a wide array of services, including:
- Physician services
- Hospitalization
- Physical therapy and rehabilitation
- Chiropractic care
- Dental treatment
- Prescription medications
- X-rays and laboratory services
- Any other necessary and reasonable care as determined by the treating physician, in accordance with established treatment guidelines.
In most cases, for medical treatment beyond the initial first aid, a process called utilization review (UR) is implemented. When a treating physician requests specific treatments, these requests are submitted to the workers’ compensation insurer for review. The insurer then decides whether to approve, modify, or deny the requested treatment. If a treatment request is modified or denied, the injured worker has the right to challenge this decision through an independent medical review (IMR). For detailed information on UR and IMR processes, resources are available from the Division of Workers’ Compensation’s (DWC) Medical Unit, a part of the Department of Industrial Relations (DIR).
Initial Medical Treatment: Generally, employers are responsible for arranging medical care for the first 30 days following the report of a work-related injury or illness. However, employees have the option to receive treatment from their personal physician if they have pre-designated that physician before the injury or illness occurred. Predesignation requires the employee to formally notify their employer in writing of their choice to be treated by their personal doctor in case of a workers’ comp claim.
Health Care Organizations (HCOs) and Medical Provider Networks (MPNs): If an employee has not pre-designated a personal physician, and their employer or insurer has established a Health Care Organization (HCO) or a Medical Provider Network (MPN), the injured employee will typically receive initial treatment within that network. The ability to change treating physicians depends on whether the employee is within an HCO, MPN, or under the care of a pre-designated physician. Employees seeking clarification on their medical treatment options and physician choices should contact the Information and Assistance Officer at their local DWC office.
First Aid Treatment
First aid is considered a crucial component of medical care under workers’ compensation. Employers are legally obligated to provide first aid treatment to their injured employees. The California Department of Insurance (CDI) and the DWC emphasize the importance of adhering to Section 6409(a) of the California Labor Code regarding first aid and reporting.
Doctor’s First Report (DFR): California Labor Code Section 6409(a) mandates that any physician treating an employee for a work-related injury or illness must file a “Doctor’s First Report of Occupational Injury or Illness” (DFR) with the claims administrator. This requirement applies to all cases, including first aid situations where no time is lost from work. It’s important to note that while “first aid” exceptions exist for Employer’s Reports (Form 5020) and Employee Claim Forms (DWC-1), no such exception exists for the DFR. Insurance companies (or self-insured employers) are required to forward these DFRs to the DIR.
Fraud Prevention: Both the CDI and DIR are actively working to prevent improper arrangements where employers might influence the classification of injuries by medical providers. Some instances involve employers directing physicians to send DFRs only to the employer, not to the insurance company, even when injuries go beyond basic first aid. These arrangements are sometimes marketed as strategies to control or lower insurance premiums. Such practices are illegal and can lead to criminal charges related to premium fraud and the wrongful denial of workers’ compensation benefits.
Temporary Disability Benefits
Temporary disability (TD) benefits are designed to provide wage replacement for employees who are temporarily unable to work due to a work-related injury or illness. If an employee cannot return to work for more than three days following an injury, they become eligible for these benefits.
Eligibility and Payment: To receive temporary disability benefits, a physician must certify that the employee is unable to work because of the work-related injury or illness. Benefits are not paid for the first three days of lost work unless the employee is hospitalized overnight or is unable to work for more than 14 days.
Wage Replacement Rate: Temporary disability benefits are calculated to replace two-thirds of the employee’s lost wages, up to a maximum amount set by law. Payments are typically made every two weeks and continue until the employee is able to return to work or until their medical condition becomes “permanent and stationary,” meaning it has stabilized and is not expected to improve further with ongoing treatment. There are legal limits on the duration of temporary disability benefits, which vary based on the date of injury and the type of injury sustained.
Permanent Disability Benefits
When a work-related injury or illness results in a permanent impairment, employees may be entitled to permanent disability (PD) benefits. Permanent impairment signifies a lasting impact on the employee’s physical or mental functions.
Calculating Permanent Disability: The amount of permanent disability benefits is determined using a formula that considers several factors:
- The extent of the physical injury or disfigurement
- The employee’s age at the time of injury
- The employee’s occupation
- The date of injury
- Apportionment: This considers what portion of the disability is directly caused by work versus other factors.
- Adjustment Factor: This accounts for the injured worker’s diminished future earning capacity.
Current workers’ compensation laws dictate the benefit amounts, including minimum and maximum limits. Benefits are typically paid every two weeks until a maximum total amount is reached, or a lump-sum settlement is negotiated.
Schedule for Rating Permanent Disabilities: The percentage of permanent disability is assessed using the Schedule for Rating Permanent Disabilities. This schedule provides a standardized method to evaluate permanent impairments and limitations. There are different schedules in use, depending on the date of injury. These schedules are accessible through the Department of Industrial Relations (DIR) Website.
Medical Evaluations for Permanent Disability: A physician assesses the injured worker’s permanent impairment and limitations to determine the PD rating. This physician can be:
- The treating physician
- A Qualified Medical Evaluator (QME): QMEs are physicians certified by the DWC Medical Unit to conduct medical evaluations in workers’ compensation cases.
- An Agreed Medical Evaluator (AME): In cases where the employee is represented by an attorney, an AME may be agreed upon by both parties to conduct the evaluation.
Disagreements and Medical Evaluations: If there’s a disagreement with the treating physician’s opinion, and the employee is not represented by an attorney, they can request a QME evaluation. The DWC Medical Unit provides a three-member QME panel for the employee to choose from.
For represented employees, if there’s a disagreement, the attorney and insurer must try to agree on an AME. If they cannot agree, and the injury date is 2005 or later, the DWC Medical Unit will provide a three-member QME panel. If the injury date is before 2005, each party can select their own QME. If the evaluations differ significantly, the permanent disability percentage may be determined through negotiation or, if necessary, litigation.
Supplemental Job Displacement Benefit (SJDB)
The Supplemental Job Displacement Benefit (SJDB) is designed to assist injured workers in re-entering the workforce if they are unable to return to their previous job due to their injury. There are two versions of this benefit, depending on the date of injury.
SJDB for Injuries Between 01/01/04 and 01/01/13: For injuries occurring within this timeframe, the SJDB is provided as a non-transferable voucher. This voucher is intended for education-related retraining and/or skill enhancement at state-approved or accredited schools. The voucher can cover expenses like:
- Tuition and fees
- Books and supplies
- Other school-required expenses
Up to 10 percent of the voucher can be used for vocational or return-to-work counseling services. To qualify for this benefit, the injured employee must:
- Have sustained permanent disability.
- Be unable to return to work with their previous employer within 60 days after temporary disability benefits end.
- Not have been offered suitable modified or alternative work by their employer in a timely manner.
The voucher amount has a legal maximum limit, which varies based on the extent of permanent disability.
SJDB for Injuries On or After 01/01/13: For injuries on or after January 1, 2013, the SJDB remains a non-transferable voucher for education-related retraining and skill enhancement. However, the usage has been broadened. The voucher can be used at:
- California public schools
- Any provider on the state’s Eligible Training Provider List
It can cover:
- Tuition, fees, books, and tools
- Licensing or professional certification fees
- Related exam fees and exam preparation courses
- Computer equipment (up to $1,000)
- Miscellaneous expenses (up to $500 reimbursement)
Employees with permanent disability who are not offered regular, modified, or alternative work by their employer in a timely manner are eligible for this benefit. The voucher is redeemable for up to $6,000, regardless of the degree of permanent disability. In most situations, the voucher cannot be cashed out or included as part of a settlement agreement.
Return-to-Work Supplement Program (RTWSP)
The Return-to-Work Supplement Program (RTWSP), administered by the DIR, provides an additional layer of support for injured workers. It offers a one-time supplemental payment to employees who experience a significant loss of earnings relative to their permanent disability rating.
Eligibility and Application: Employees with an injury date on or after January 1, 2013, who have received an SJDB voucher for that injury are eligible to apply for the RTWSP benefit. To apply, employees must complete an online application on the DIR Website. The application must be submitted within one year of the date the SJDB voucher was issued. If approved, eligible employees receive a one-time payment of $5,000 under current law.
Death Benefits
In the tragic event of a work-related fatality, workers’ compensation provides death benefits to support surviving dependents.
Burial Expenses: Workers’ compensation covers reasonable burial expenses up to a legally defined maximum amount.
Dependent Support Payments: Qualified surviving dependents may also receive ongoing support payments. These payments are typically made at the same weekly rate as the maximum temporary disability benefit. The total amount of death benefits depends on the number of dependents and their level of dependency (partial or total).
Frequently Asked Questions About Workers’ Compensation
To further clarify how workers comp work, here are answers to some frequently asked questions:
How Is Coverage Structured in a Workers’ Compensation Policy?
Workers’ compensation coverage is typically provided under Part One of a workers’ compensation insurance policy. Under Part One, the insurance company commits to promptly pay all benefits and compensation owed to an injured worker as mandated by the workers’ compensation laws of the state(s) listed in the policy’s Declarations/Information page. Workers’ compensation insurance is considered the exclusive remedy for workplace injuries.
Exclusive Remedy Explained: This principle means that in exchange for employers assuming strict liability for work-related injuries, workers’ compensation benefits are the sole avenue of recourse for injured employees against their employers. Generally, an employee covered by workers’ compensation cannot sue their employer in civil court for damages related to a work-related injury.
Employers’ Liability Insurance (Part Two): While workers’ compensation is usually the exclusive remedy, Employers’ Liability insurance, offered under Part Two of the policy, provides crucial additional protection. It covers situations where an employee’s injury or illness may not fall strictly under workers’ compensation laws. Employers should consult with a licensed commercial broker-agent to understand Employers’ Liability coverage as part of their overall workers’ compensation insurance strategy.
Who Is Required to Purchase Workers’ Compensation Insurance?
In California, Labor Code Section 3700 mandates that all employers must provide workers’ compensation benefits to their employees. This requirement applies if a business employs one or more individuals. Certain contractors are also legally required to carry workers’ compensation insurance, even if they do not have employees themselves.
Sole Proprietors and Workers’ Comp: A business owner who is a sole proprietor might want to purchase workers’ compensation insurance to cover themselves. To include a sole proprietor in a workers’ compensation policy, it must be explicitly stated in the policy or added as a coverage endorsement. However, it’s important to consider that workers’ compensation is a form of liability insurance where the employer assumes liability for work injuries. For a sole proprietor, health, life, or disability income insurance might be more suitable alternatives. Consulting with a licensed commercial broker-agent or a casualty broker-agent can help sole proprietors determine the best insurance solutions.
Corporate Officers and Partners: Executive officers and directors of private or quasi-public corporations are generally required to be included in workers’ compensation coverage if they perform actual services for the corporation for pay. However, they can elect to be excluded. An officer or director owning at least 10% of the corporation’s stock (or 1% if a specified family member owns at least 10%) and who is covered by a health insurance policy can waive workers’ compensation coverage in writing. Similarly, general partners in a partnership or managing members of an LLC receiving wages can also waive coverage through a written waiver. Employers should discuss these inclusion/exclusion options with a licensed commercial broker-agent.
Defining “Employee”: California Labor Code Section 3351 defines who is considered an “employee” and therefore must be covered by workers’ compensation. Section 3352 automatically excludes certain types of workers and outlines how others may waive coverage. It’s important to note that employers can choose to provide workers’ compensation coverage even for workers who are not legally mandated to be covered. Whether a business is a sole proprietorship, partnership, LLC, or corporation, establishing a relationship with a knowledgeable broker-agent is beneficial for navigating coverage eligibility and business-specific options.
How Is Workers’ Compensation Insurance Purchased?
Employers have several options for purchasing workers’ compensation insurance in California:
- Licensed Insurance Companies: Purchase insurance from any insurance company licensed to sell workers’ compensation in California.
- State Compensation Insurance Fund (State Fund): State Fund is a state-operated entity that provides workers’ compensation insurance on a non-profit basis. It competes with private insurers and also serves as the “insurer of last resort” if private companies are unwilling to provide coverage.
- Self-Insurance: Employers meeting specific requirements can become self-insured for workers’ compensation, assuming direct responsibility for claims.
Broker-Agent Assistance: A commercial broker-agent can assist businesses in purchasing workers’ compensation insurance from licensed insurance companies and provide information about State Fund and self-insurance options. The California Department of Insurance (CDI) website (www.insurance.ca.gov) offers resources, including a list of licensed insurers and an online rate comparison of top workers’ compensation insurers.
State Fund Information: Businesses interested in State Fund can contact them directly or consult with a licensed commercial broker-agent. Contact information for State Fund is available in the “Resources” section.
Self-Insurance Requirements: To become self-insured, a business must obtain a certificate from the DIR’s Office of Self-Insurance Plans (OSIP). Private employers are required to post security or participate in alternative security deposit programs with the Self-Insurers’ Security Fund as a condition of self-insurance. Historically, self-insurance was primarily an option for very large companies, but group self-insurance, where smaller employers in the same industry pool their liabilities, has become increasingly popular. For detailed information on self-insurance, contact OSIP (contact information in “Resources”).
What Happens If an Employer Fails to Purchase Workers’ Compensation Insurance?
Employers who fail to secure workers’ compensation insurance are in violation of the California Labor Code and face significant penalties.
Division of Labor Standards Enforcement (DLSE) Actions: The DLSE has the authority to issue a stop order, immediately shutting down business operations of unlawfully uninsured employers until they obtain coverage. In addition to stop orders, the DLSE can assess substantial fines. The fine amount depends on whether the lack of insurance was discovered through a routine investigation or after an injured worker filed a claim with the Uninsured Employers Benefits Trust Fund.
Criminal and Financial Penalties: Failing to have workers’ compensation coverage is a misdemeanor in California. Penalties include:
- Imprisonment in county jail for up to one year.
- Fines up to double the premium that would have been required for coverage during the uninsured period (minimum fine of $10,000).
- Both imprisonment and fines.
- State-imposed penalties up to $100,000.
Liability for Employee Injuries: If an employee is injured or becomes ill at work and the employer is uninsured, the employer is personally responsible for paying all costs related to the injury or illness.
Loss of Exclusive Remedy Protection: Workers’ compensation’s “exclusive remedy” protection only applies when an employer is properly insured.
Civil Actions: If an employer is illegally uninsured and an employee is injured or ill due to work, the employee can file a civil lawsuit against the employer in addition to filing a workers’ compensation claim.
Reimbursement to UEBTF and Fraud Prosecution: Uninsured employers may also be required to reimburse the Uninsured Employers Benefits Trust Fund for benefits paid to injured workers. Furthermore, intentionally failing to secure workers’ compensation insurance is considered insurance fraud and can be prosecuted. The CDI collaborates with other agencies and local district attorneys to investigate and prosecute workers’ compensation fraud. Employers can contact the Information and Assistance Officer at their local DWC office for more information.
What Is the Uninsured Employers Benefits Trust Fund and the Subsequent Injuries Benefits Trust Fund?
Uninsured Employers Benefits Trust Fund (UEBTF): The UEBTF is a state fund that provides workers’ compensation benefits to employees who suffer work-related injuries or illnesses when their employer is illegally uninsured.
UEBTF Function: When an uninsured employer fails to pay or secure funds to cover workers’ compensation obligations, the UEBTF steps in to handle the claims. The UEBTF then attempts to recover the costs paid from the uninsured employer. Contact information for the UEBTF is in the “Resources” section.
Subsequent Injuries Benefits Trust Fund (SIBTF): The Subsequent Injuries Benefits Trust Fund (SIBTF) provides additional compensation to employees who already had a pre-existing permanent disability or impairment and then experience a subsequent work-related injury or illness.
SIBTF Eligibility: To be eligible for SIBTF benefits, the combined permanent disability from both injuries must be at least 70 percent, and other specific eligibility requirements must be met. It is important to note that employers are not responsible for the combined disability if part of it is due to non-work-related factors. The employer is only liable for the compensation related to the later work-related injury. For more information on SIBTF, contact details are in the “Resources” section.
How Is Workers’ Compensation Premium Calculated?
Understanding how workers comp premium calculated is important for employers to manage costs. Workers’ compensation premiums are not arbitrary figures; they are based on a structured calculation system.
Classification
The foundation of premium calculation is classification. Employers are categorized based on their business operations and the associated risks of those operations. The Workers’ Compensation Insurance Rating Bureau of California (WCIRB) develops these classifications, assigning specific codes to distinct occupations, industries, or businesses. These classifications and codes are then approved by the Insurance Commissioner. Workers’ compensation insurers generally use these standardized classifications when writing policies. While insurers can develop their own classification systems, it is uncommon due to the rigorous approval process.
WCIRB Policyholder Ombudsman: The WCIRB provides a policyholder ombudsman who can answer employer questions about classifications, experience modifications, and rating issues. Contact information is in the “Resources” section.
Open Rating
California operates under an “open” rating system. This means that each workers’ compensation insurer sets its own rates for each industry classification code, based on their assessment of the risk and their need to cover potential losses and expenses. Insurers must file these rates and all supporting rate information with the CDI before they can be used.
Rate Adequacy: A key factor in rate review is rate adequacy. Rates must be sufficient to ensure the insurance company’s financial stability (solvency). Adequate rates also contribute to building the necessary surplus funds insurers need to meet current and future claim obligations. The Insurance Commissioner will not approve rates that are inadequate, unfairly discriminatory, or tend to create a monopoly. However, the Commissioner’s authority does not extend to disapproving rates solely because they are considered excessive.
Premium Modification
The classification code and its corresponding rate are the initial components of premium calculation. The rate is expressed in dollars and cents per $100 of payroll. The estimated payroll for each classification is multiplied by the applicable rate to arrive at the “base” premium. This base premium is further adjusted using rating plans (like schedule or judgment rating) and experience modification. (Definitions of schedule and judgment rating are in the “Glossary” section).
Experience Modification
Experience modification (or “X-Mod”) is a critical factor in premium calculation. It reflects an employer’s past claims history compared to other employers of similar size in the same industry. Insurance companies are required to submit payroll and loss information annually to the WCIRB. The WCIRB uses a formula approved by the CDI to calculate an experience modification for each eligible employer. This formula considers payroll and losses (paid losses and loss reserves) over a specific “experience period.”
X-Mod Interpretation: An experience modification below 100% indicates better-than-average claims experience, potentially leading to lower premiums. An X-Mod above 100% suggests worse-than-average experience and may result in higher premiums. The experience modification, along with other modifications, is applied to the base premium to determine the estimated policy premium.
Prospective Rating
The standard workers’ compensation rating method described above is called prospective rating. While other rating plans exist (e.g., dividend plans, retrospective rating), prospective rating is the most common. Businesses interested in exploring different rating methods should consult with a licensed broker-agent.
Premium Audit
The final premium for a workers’ compensation policy cannot be definitively calculated until the policy term ends and a premium audit of the employer’s payroll records is conducted. The audit verifies if the initial payroll estimate was accurate.
Audit Adjustments: If the actual payroll was higher than estimated, the employer will owe additional premium. If the payroll was lower, the insurance company will refund premium. Because payrolls can fluctuate, some insurers offer monthly payroll reporting options. If monthly reporting isn’t available, employers should work closely with their broker-agent or underwriter to report significant payroll changes during the policy term. Accurate payroll estimates throughout the policy term can help avoid large audit bills or large return premiums, which can impact cash flow.
Audit Rights and Consequences: Insurers generally have the right to audit payroll records during the policy period and for up to three years after the policy ends. While typically reserved for the final audit, interim audits can also occur. Failure to cooperate with an audit can lead to policy cancellation or non-renewal. Insurers can pursue legal means to collect outstanding premiums. Furthermore, employers who refuse audits may be liable for a premium penalty of up to three times the estimated policy premium. The WCIRB can also calculate experience modifications using reported losses but without audited payroll data, often resulting in an increased X-Mod. Deliberate underreporting of payroll is considered insurance fraud and is subject to prosecution. The WCIRB also has the right to audit employer payroll records to verify the accuracy of insurer audits.
Does the CDI Handle Workers’ Compensation Claim Issues?
It’s important to understand that the California Department of Insurance (CDI) primarily deals with insurance-related issues, not direct workers’ compensation claim disputes. Most claim disputes fall under the jurisdiction of the Division of Workers’ Compensation (DWC).
DWC Assistance: The DWC is the primary state agency assisting employers and employees with workers’ compensation claims. For questions or concerns about a claim, employers and employees should contact the DWC’s Information and Assistance Unit.
Dispute Resolution: The DWC’s Information and Assistance Unit can help unrepresented injured workers resolve claim disputes informally. If informal resolution is not possible, a formal Application for Adjudication (dispute resolution) can be filed with the DWC. The Information and Assistance Unit can assist injured workers in filing this application, unless they have retained an attorney. The DWC has exclusive jurisdiction over workers’ compensation claim disputes.
CDI Role in Fraud Investigation: While the CDI doesn’t handle routine claim disputes, it does investigate instances of fraudulent submission or denial of workers’ compensation claims (California Insurance Code Section 1871.4).
Contacting the DWC: Contact information for the DWC, including the Information and Assistance Unit, is available in the “Resources” section. Employers can also discuss general claim issues with their broker-agent or specific claim details with the assigned claims adjuster at their workers’ compensation insurer.
What Workers’ Compensation Issues Does the CDI Handle?
The CDI’s primary role in workers’ compensation is overseeing rating and underwriting issues. Consumers (primarily employers in this context) can contact the CDI with concerns related to these areas.
Common CDI Jurisdictional Issues: The CDI can assist with issues such as:
- Insurer compliance with filed rates
- Rating errors
- Classification and experience modification disputes
- Failure to provide loss history reports
- Policy cancellation and nonrenewal notices
- Audit disputes
- Dividend plan issues
- Broker-agent handling (related to rating/underwriting)
- Insurance fraud
Dispute Resolution Procedures: Title 10 of the California Code of Regulations (CCR) Sections 2509.40 – 2509.78 outlines detailed procedures for disputing experience modifications and classification assignments, including appeals to the CDI. For rating and underwriting difficulties, contact the CDI using the “Talk to Us” information in the “Resources” section. The CDI can often assist in resolving these types of workers’ compensation issues. If an issue falls outside the CDI’s jurisdiction, they will refer the consumer to the appropriate state agency.
Reporting Fraud: It is crucial to contact the CDI to report any suspected workers’ compensation fraud. Fraud reports can be filed anonymously. Providing complete and credible information increases the likelihood of successful investigation and prosecution of fraud.
Q: What is a loss reserve?
A: Loss reserves are a critical accounting tool used by insurance companies to estimate the financial value of each claim. A loss reserve is a designated amount of money that an insurance company sets aside to cover the anticipated costs of a specific claim. Claims adjusters typically set loss reserves based on their experience and judgment, drawing on data from similar past claims.
Importance of Loss Reserves: Accurate loss reserves are essential for several reasons:
- Financial Stability: They help determine how much surplus capital an insurance company needs to maintain to meet its current, future, and potential claim obligations.
- Experience Modification Calculation: Insurance companies report workers’ compensation loss reserves to the WCIRB. This data is used by the WCIRB in calculating experience modifications (X-Mods), which directly impact employer premiums.
- Solvency: Poor loss reserve practices can jeopardize an insurer’s financial health. Both overestimating and underestimating reserves can lead to misallocation of funds and an inaccurate picture of the insurer’s financial obligations. Insufficient reserves can threaten an insurer’s solvency.
- Fair Premiums: Conversely, overly inflated loss reserves can artificially inflate experience modifications, potentially leading to unfairly higher premiums for insured employers.
Because insurer solvency is paramount, loss reserves must be as accurate as possible and regularly reviewed and revised based on the most up-to-date claim information.
Q: How does an employer request a workers’ compensation premium and loss history report?
A: Workers’ compensation premium and loss history reports, often called “loss runs,” are essential for employers to understand their claims history and manage insurance costs. To request a loss run, the policyholder or their authorized broker-agent must submit a written request to the insurance company.
Legal Requirements for Insurer Response: California Insurance Code Section 11663.5 mandates that insurance companies must comply with loss run requests within 10 business days under specific circumstances:
- Policy Cancellation or Nonrenewal: When a policy is cancelled or not renewed by the insurer.
- Pre-Renewal Request: If the policyholder requests the information within 60 days before the renewal date of an existing policy.
- Insurer Downgrade: If the insurer’s financial rating is downgraded by a nationally recognized rating service to below “secure” or “good,” or to a level that negatively impacts the policyholder’s business operations.
- Insurer Conservation: If the insurer is placed under conservation by the Department of Insurance or ordered to cease writing business.
CDI Assistance: If an insurance company fails to comply with a written loss run request under these circumstances, the policyholder should contact the CDI for assistance using the “Talk to Us” information in the “Resources” section.
Q: What is a minimum premium?
A: Minimum premium is a standard practice in insurance, including workers’ compensation. Insurance companies incur costs in issuing and servicing policies, regardless of the size of the insured business or the calculated premium. When a company has a very small payroll, the standard premium calculation might result in a very low premium amount.
Purpose of Minimum Premium: If the calculated premium is so low that it doesn’t even cover the insurer’s basic administrative and operational expenses, it becomes financially unsound for the insurer to underwrite the risk. The insurer would be losing money from the outset, even before any claims occur. By setting a minimum premium, an insurance company establishes the lowest premium it is willing to charge to accept a particular risk. Each insurance company must file its minimum premium requirements with the CDI as part of its overall rating plan.
Q: What happens when an employer cancels a policy during the policy year?
A: When an employer cancels a workers’ compensation policy mid-term (before the policy year ends), whether to switch insurers or close a business, the insurance company will typically refund any unearned premium on a pro rata basis. Pro rata means the refund is proportional to the remaining unexpired portion of the policy term.
Short Rate Cancellation: However, there is an exception. If the insurer has disclosed to the policyholder, as required by California Insurance Code Section 481(c), that cancellation will be on a short rate basis, a different refund calculation applies. Short rate cancellation involves an administrative penalty charged to the policyholder for canceling the policy before the agreed-upon term. This penalty reduces the amount of premium refunded.
Minimum Premium Application: Even with pro rata or short rate cancellation, an insurance company may still charge a minimum premium for the cancelled policy if the calculated cancellation refund amount (after short rate penalty, if applicable) falls below the insurer’s stated minimum premium. This ensures the insurer recovers at least the minimum amount to cover its initial policy issuance and servicing costs. Employers experiencing issues with policy cancellation or premium refunds can contact the CDI using the “Talk to Us” information.
Q: How does the insolvency of an insurance company affect outstanding claims?
A: The insolvency (financial failure) of an insurance company is a serious situation, but fortunately, there are safeguards in place to protect both employers and employees in workers’ compensation.
Conservation and Liquidation: When a California-licensed insurance company becomes insolvent, the Insurance Commissioner, appointed by the courts, oversees the conservation and liquidation process. The Conservation and Liquidation Office (CLO) of the CDI manages the details of this process.
California Insurance Guarantee Association (CIGA): Because timely payment of workers’ compensation claims is critical, the CLO works closely with the California Insurance Guarantee Association (CIGA). CIGA acts as a safety net, ensuring that claim payments continue even if the insolvent insurer’s assets are insufficient to cover all claims. CIGA guarantees the continuation of claim payments, alleviating the burden on both employers and employees during an insurer insolvency. For further information on conservation and liquidation, contact the CDI. Contact information for CIGA is also in the “Resources” section.
Q: What exactly is a dividend plan?
A: A dividend plan is a type of rating plan in workers’ compensation insurance that allows employers to potentially share in the profits of their insurer. Dividend plans are often referred to as participating insurance policies because the policyholder participates in the insurer’s financial success.
Dividend Contingency: Under a dividend plan, the payment of a dividend is not guaranteed. It is typically contingent on two main factors:
- Insurer Profitability: The overall financial profitability of the insurance company.
- Insured’s Loss Experience: The specific employer’s claims history and loss experience may also be a factor in dividend eligibility and amount.
Types of Dividend Plans: Various types of dividend plans exist, each with its own specific provisions and requirements. Employers interested in exploring alternatives to prospective rating (the standard premium calculation method) should discuss dividend plan options with their broker-agent. All dividend plans must be filed with and approved by the CDI.
Q: Can an insurance broker-agent or insurance company guarantee the amount of a future workers’ compensation dividend?
A: No. California regulations explicitly prohibit insurance broker-agents or insurance companies from guaranteeing or promising any specific amount for future workers’ compensation dividends (see Title 10, Chapter 5, Subchapter 3, Article 9, Section 2504 of the California Code of Regulations).
Permitted Illustrations vs. Prohibited Guarantees: While broker-agents or company representatives can provide historical dividend payment amounts for illustrative purposes, they cannot make any direct or indirect promises or guarantees about future dividend payouts. Any statement that implies a guaranteed future dividend amount is a misrepresentation. Employers who believe a broker-agent or company representative is misrepresenting a dividend plan, especially by promising future dividend results, should immediately contact the CDI using the “Talk to Us” information.
Q: What can an employer do if there is a dispute regarding a workers’ compensation classification code?
A: If an employer disagrees with the classification code assigned by their workers’ compensation insurer, the first step is to discuss the issue with their broker-agent or insurance company underwriter. They should request a clear explanation of the classification code and why it was assigned.
Reclassification Notification: If an insurance company changes a classification code that results in a premium increase, California Insurance Code Section 11753.1(b) requires the insurer to inform the employer in writing of the change within 30 days. This requirement does not apply if the reclassification is due to a CDI regulation or under the Insurance Commissioner’s authority.
Dispute Resolution Process: If the dispute persists after discussing it with the insurer, the employer can file a formal written complaint with the insurance company. If this doesn’t resolve the issue, the employer can appeal to the CDI. (Use the “Talk to Us” contact information for CDI appeals). Similarly, if an employer disagrees with a classification decision made by the WCIRB, they can initially file a written inquiry with the WCIRB. If the inquiry is denied or not answered within 90 days, the employer can pursue the dispute by serving the WCIRB with a Complaint and Request for Action (CRFA). If the CRFA is rejected or not acted upon within 30 days, the employer can then contact the CDI and file an appeal. (WCIRB contact information is in the “Resources” section). Refer also to the “What Workers’ Compensation Issues does the CDI Handle?” section for more information on appeals for classification and experience modification issues.
Glossary of Workers’ Compensation Terms
Understanding the terminology used in workers’ compensation is essential for effective communication and navigating the system. Here is a glossary of key terms:
Agent
A licensed individual or organization authorized to sell and service insurance policies on behalf of an insurance company.
Agreed Medical Evaluator (AME)
A physician selected by the parties involved in a workers’ compensation case, typically when the injured worker is represented by an attorney, to resolve disputed medical-legal issues.
Binder
A temporary, short-term agreement that provides insurance coverage until the full policy can be issued or delivered.
Broker
A licensed individual or organization who sells and services insurance policies on behalf of the insured employer, representing the employer’s interests.
Broker-agent
A licensed individual who can act as both an agent (representing one or more insurers) and a broker (representing the insured employer and dealing with multiple insurers).
Cancellation
The termination of an insurance policy, either by the insured or the insurer, before its normal expiration date.
Claim
Formal notification to an insurance company that a loss has occurred that may be covered under the terms of the insurance policy.
Claims Adjuster
In workers’ compensation, the individual who evaluates and manages workers’ compensation claims, determining the appropriate benefits and payments according to policy terms.
Commercial Lines
Insurance coverages designed for businesses, commercial institutions, and professional organizations, as opposed to personal insurance lines.
Commission
A percentage of the policy premium paid by the insurance company to an agent as compensation for their sales and service work.
Conditions
The section of an insurance contract that outlines the rights and responsibilities of both the insured (policyholder) and the insurer (insurance company).
Consequential Bodily Injury
In workers’ compensation, this refers to situations where a work-related injury leads to a secondary, non-work-related injury as a consequence of the original injury.
Coverage
The protection provided by an insurance policy, outlining the risks and losses the insurer will cover.
Declarations (DEC) Page
Usually the first page of an insurance policy, also known as the Information Page. It contains key policy details like the insurer’s name, policy number, effective and expiration dates, premium amount, types and amounts of coverage, and deductibles (if any).
Deductible
The portion of a covered loss that the insured is responsible for paying out-of-pocket before the insurance policy benefits begin to pay.
Dual Capacity
In workers’ compensation, this legal concept applies when an employer can be held liable in two ways to an employee injured on the job due to a product or service produced by that employer. The employee may be eligible for workers’ compensation benefits and may also have grounds to sue the employer separately due to the defectiveness of the product or service that caused the injury.
Earned Premium
The portion of the total policy premium that corresponds to the expired part of the policy term. This is the premium the insurance company has “earned” over time and allocates to cover losses, expenses, and profit to date.
Effective Date
The date on which an insurance policy goes into effect, marking the start of coverage.
Endorsement
Also called an “endorsement form,” this is a document or agreement that modifies, adds to, subtracts from, clarifies, or revises the original insurance policy form. It is attached to the policy to become legally effective.
Exclusion
A specific provision within an insurance policy that explicitly denies or restricts coverage for certain perils (risks), individuals, property, locations, or situations.
Experience Modification
A numerical factor, expressed as a percentage, used to adjust workers’ compensation premiums for qualifying employers. It reflects the employer’s past claims history compared to similar employers in the same industry and size. An X-Mod below 100% is generally considered better-than-average, and above 100% is worse-than-average.
Expiration Date
The date on which an insurance policy coverage ends, as stated in the policy documents.
First Party
In an insurance contract, the first party is the policyholder, also known as the insured.
Flat Cancellation
A policy cancellation that occurs on the policy’s effective date. In this case, no premium is charged, although certain service fees might still apply.
Fraud
An intentional act of deception committed to gain an unfair or unlawful advantage, typically involving financial gain.
Frequency
In insurance, frequency refers to how often losses occur within a given timeframe or risk pool.
Hazard
A condition or circumstance that increases the likelihood of a loss occurring or the potential severity of a loss.
Indemnity
The core principle of property and casualty insurance contracts. Indemnity aims to restore the insured to the same financial position they were in before a covered loss occurred. Essentially, it means compensation for a loss.
Independent Adjuster
A person or organization that provides claims adjusting services to various insurance companies on a contract basis, rather than being directly employed by a single insurer.
Insurance
A risk management mechanism where risk is transferred from an individual, business, or organization to an insurance company. In exchange for paying a premium, the insurance company agrees to be financially responsible for certain defined covered losses.
Insured
The policyholder(s) who are entitled to insurance coverage and benefits under an insurance policy.
Insurer
The insurance company that issues the insurance policy and agrees to pay for covered losses and provide the benefits outlined in the policy.
Judgment Rating
A type of rating modification (either a premium decrease or increase) that is based on an insurance underwriter’s professional experience, judgment, and risk analysis when classifying and underwriting a specific type of risk.
Lapse
In property and casualty insurance, a lapse occurs when a policy terminates because the policyholder fails to pay the premium when due or when an employer’s policy ends without replacement coverage.
Liability Insurance
Insurance coverage that protects a policyholder against legal liability stemming from injuries caused to other people or damage to their property.
License
A certificate of authority issued by the CDI to an insurer, agent, broker, or broker-agent, granting them the legal permission to conduct insurance business in California.
Limits of Insurance
The maximum amount of benefits that the insurance company is obligated to pay for a covered loss under an insurance policy.
Managing General Agent (MGA)
An agent who is contractually authorized by an insurance company to manage a significant portion or all of the insurer’s business operations within a specific territory. MGAs can handle various functions, including marketing, underwriting, policy issuance, premium collection, agent appointment and supervision, claims payments, and reinsurance negotiations.
Material Misrepresentation
A false statement of fact made by an applicant for insurance that is significant enough that, if the insurance company had known the truth at the time of policy issuance, it would have refused to issue the policy.
Misquote
An inaccurate or incorrect estimate of an insurance premium provided to a potential insured.
Nonpayment of Premium
The policyholder’s failure to pay the required policy premium, or installment payments, by the due date.
Nonrenewal
The decision by an insurance company to terminate an insurance policy at its normal expiration date, rather than offering to renew it for another term.
Occupational Accident
A work-related accident that results in injury to an employee.
Occupational Disease
An illness or disease that an employee contracts as a direct result of exposures and conditions in their employment or work environment.
Occupational Hazard
A condition or element present in a particular occupation or work environment that increases the risk of accidents, illnesses, or fatalities.
Occurrence
A type of liability insurance policy that provides coverage for claims arising from incidents (“occurrences”) that take place during the policy period, regardless of when the actual claim is filed.
Personal Lines
Insurance policies written to cover the personal and real property of individuals or families. Examples include homeowners insurance and personal auto insurance, as distinguished from commercial lines insurance for businesses.
Policy
A legally binding contract between an insurance company (insurer) and a policyholder (insured) that outlines the rights and obligations of each party.
Premium
The monetary payment made by the insured to the insurance company in exchange for the insurance coverage and the insurer’s promise to indemnify against potential losses. It’s the price of insurance protection.
Producer
A general term used in the insurance industry to refer to agents, brokers, broker-agents, and solicitors – individuals licensed to sell and market insurance products.
Pro Rata Cancellation
A cancellation of an insurance policy initiated by the insurance company where the policyholder receives a refund of the unearned premium, which is the portion of the premium for the remaining, unexpired period of the policy.
Provisions
The detailed statements within an insurance policy that specify the policy conditions, exclusions, limitations, and other terms and agreements of the insurance contract.
Qualified Medical Evaluator (QME)
A physician who is certified and regulated by the DWC’s Medical Unit to conduct medical evaluations of injured workers in workers’ compensation cases. QMEs assess permanent impairments and limitations and resolve disputed medical-legal issues. They often perform independent medical evaluations when there is disagreement with the treating physician’s opinions.
Quotation
An estimated cost of insurance coverage based on the information provided by the applicant to the agent, broker, broker-agent, or directly to the insurance company. It’s an initial price estimate, not a guarantee of coverage or final premium.
Regulations
Rules and requirements developed by state agencies, such as the CDI, to implement and enforce laws passed by the state legislature. Regulations undergo a public comment process and must be approved by the state Office of Administrative Law before taking effect.
Reinstatement
The process of restoring a policy that has lapsed or been cancelled back to active coverage. Reinstatement typically requires fulfilling certain conditions, such as paying overdue premiums.
Renewal
The continuation of an insurance policy for a new policy term when offered by the same insurance company that issued the original policy.
Schedules for Rating Permanent Disabilities
Standardized schedules used in workers’ compensation systems to determine the percentage of permanent disability resulting from an injury. These schedules provide guidelines for evaluating different types of impairments and their severity.
Schedule Rating
A method of pricing property and liability insurance that uses a base rate and then applies debits (increases) and credits (decreases) based on specific characteristics of the risk exposure. Schedule rating acknowledges that certain physical features and risk management practices directly correlate with the potential for loss. All schedule rating plans must be filed with and approved by the CDI.
Second Party
In an insurance contract, the second party is the insurance company or insurer.
Resources for Workers’ Compensation Information
For further information and assistance regarding workers’ compensation in California, please refer to the following resources:
California Department of Industrial Relations Division of Labor Standards Enforcement
Headquarters:
1515 Clay Street, Room 401
Oakland, CA 94612
Phone: 510-285-2118
Division of Workers’ Compensation (DWC)
1515 Clay Street, 17th Floor
Oakland, CA 94612
Mailing Address:
PO Box 420603
San Francisco, CA 94142
Phone: 510-286-7100
Division of Workers’ Compensation (DWC) – Information and Assistance Unit
Phone: 800-736-7401
Division of Workers’ Compensation (DWC) – Uninsured Employers Benefits Trust Fund
Los Angeles Claims Unit: 213-576-7300
Oakland Claims Unit: 510-286-7067
Division of Workers’ Compensation (DWC) – Subsequent Injuries Benefits Trust Fund
Sacramento Unit: 916-928-4601
Division of Workers’ Compensation (DWC) – Medical Unit
PO Box 71010
Oakland, CA 94612
800-794-6900
California Department of Industrial Relations Office of Self Insurance Plans (OSIP)
11050 Olson Drive, Suite 230
Rancho Cordova, CA 95670
Phone: 916-464-7000
Fax: 916-464-7007
California Department of Industrial Relations Workers’ Compensation Appeals Board
There are 24 district offices and satellites located in CA
Recorded information: 800-736-7401
California Insurance Guarantee Association (CIGA)
PO Box 29066
Glendale, CA 91209-9066
Phone: 818-844-4300
State Compensation Insurance Fund (State Fund)
P.O. Box 8192
Pleasanton, CA 94588
Phone: 888-782-8338
Workers’ Compensation Insurance Rating Bureau (WCIRB)
1901 Harrison Street, 17th Floor
Oakland, CA 9612
Phone: 888-CA-WCIRB (888-229-2472)
Fax: 415-778-7272
Policyholder Ombudsman Workers’ Compensation Insurance Rating Bureau
1901 Harrison Street, 17th Floor
Oakland CA 94612
Attn: Policyholder Ombudsman
Phone: 415.778.7159
Fax: 415.371.5288
Email: [email protected]
Twitter: @wcirbombud
Filing a Complaint (Request for Assistance)
The California Department of Insurance (CDI) is dedicated to protecting your rights as a consumer. Many inquiries can be resolved through a phone call to their consumer hotline. If phone assistance is insufficient, you can file a formal Request for Assistance form by mail or online through the CDI website. The online system allows you to attach supporting documents, such as insurance policies, cancelled checks, and relevant correspondence.
Examples of Issues the CDI Can Assist With:
- Improper Denial of a Claim
- Cancellation or Non-renewal of a Policy
- Unreasonable Delay in Claim Settlement
- Alleged Misappropriation of Premiums Paid
- Alleged Misrepresentation by an Agent/Broker or Solicitor
- Unfair Underwriting Practices
- Dishonest or Deceptive Insurance Sales Tactics
Contact Us
Consumer Assistance Hotline:
1-800-927-4357
TTY 1-800-482-4833
Visit our Consumer Complaint Page
To order additional materials contact: Community Relations & Outreach [email protected]
