Workers’ compensation insurance is required of all California employers—even those who only employ one person, part-time. The policy serves as a social safety net to provide compensation for employees who become injured on the job and also limits the liability of employers if an employee sues over workplace-related injuries.
Workers’ compensation insurance premiums are collected initially as an estimate. An audit following the end of the policy term corrects any projections that were wrong during the policy term. Premiums are calculated based on employer’s industry “classification code” and the employer’s “payroll”.
The classification code is set by the Workers’ Compensation Insurance Rating Bureau, or WCIRB, a non-profit association, based on the type of work the employer does. Payroll means the size of the employer’s payroll. For every $100 an employer spends in payroll, there is a corresponding rate based on the classification codes.
Insurance companies that offer workers’ compensation policies can charge and keep a “minimum premium” when a company cancels its policy. This is the least amount of money an insurer can charge and still insure the company. The minimum premium provides assurance to the insurance company that it will not lose money on the risk before a claim has even occurred; the minimum premium allows the insurer to meet basic expenses. If an employer cancels its policy mid-term to arrange workers’ compensation coverage with another insurance company, the insurance company may return any premium owed on a “short rate” basis, which is an administrative penalty assessed to a policyholder that does not complete the full term of insurance. The insurance company could charge a minimum premium if the short rate penalty is less than the minimum premium.
Insurers file their minimum premiums with the California Department of Insurance. According to the State Compensation Insurance Fund, which is the State’s largest provider of workers’ compensation insurance, the following example illustrates the concept of a minimum premium: “An insurance company has set a minimum premium of $500 for your type of business. Assuming your actual payroll is only $20,000 with a manual rate of .78 per $100 of payroll, your calculated premium would be $156 ($200 X .78). But you would still pay $500 minimum premium instead of $156, since your insurance company has set its minimum premium at that level.” A business should shop around for the carrier with the lowest minimum premium if the company has a small payroll.
To discuss your workers comp insurance, contact attorney Drew E. Pomerance today.