If you’re an employer with more than five or more employees in the United States, you may want to consider the question, “How does a workers comp claim affect me as the employer?” The true cost of a workers compensation claim is important information. Understanding the actual cost can help the business create a safer work environment for its employees.
Most employers plan for workers comp claims because workers compensation insurance is a financial lifeline for employees suffering occupational injuries and illnesses. States require employers to buy workers compensation insurance and, according to the Department of Labor, the insurance is sometimes the employer’s most expensive coverage line.
Businesses may fail to understand that significant indirect costs aren’t covered by workers comp insurance. Additionally, if the company has an Experience Modification, each workers comp claim impacts the mod factory—and this, unfortunately, directly impacts business costs.
Workers Comp Claim Direct Costs
The direct costs associated with a workers comp claim are frequently medical costs and indemnity, if any, for wage replacement. The direct cost of the workers comp claim is the amount of money the insurer pays to resolve the injured worker’s claim. It’s also this amount that is used to factor into the Experience Modification.
Employers must bear substantial indirect costs of workers comp claims, too. Stanford University’s Department of Civil Engineering reports that indirect costs are frequently larger than direct costs. For instance, if a worker files a workers comp claim for a fracture, the average direct cost to the firm is about USD 50,000.
Indirect costs are about 10 percent more than direct costs, about USD 55,000 in this example. Indirect costs of the claim include these items:
- Wages the injured claimant received for work absences not covered by workers comp insurance
- Wages related to lost work time because of work stoppage. That is, when the worker was injured, his or her work and relating work performance stopped for a certain period of time
- Costs of overtime
- Time required by supervisors, administrators, human resources professionals, and safety professionals, etc., who provided input and/or managed the workers comp claim
- Costs associated with hire and training a replacement of the injured disabled worker
- Lost productivity in the work place as it relates to rescheduling, new worker learning curve, and accommodations made to the injured worker
- Costs of clean, repair, and/or replace machinery/equipment damaged in the accident or incident
Indirect costs may also include substantial OSHA fines, legal fees, loss of good will, third-party liability expenses, worker pain and suffering, etc.
Workers Compensation Claim and Increased Insurance Costs
An injured worker’s claim is likely to increase workers compensation insurance premiums. Imagine that the current base premium, before mod application and credits, is USD 160,000. Before the current workers comp claim, the business had no others.
Before now, the organization enjoyed a “claim-free experience.” The employer’s claim-free rating offered the best experience modification for the annual effective rating. While the claim-free rating also depends on the business size, expected loss rates (as defined by Workers Compensation Insurance Rating Bureau), the claim-free mod is about 66 percent. This means the premium for workers comp insurance is about USD 105,600.
Unfortunately, the submission of one claim—in our example, a fracture whose direct costs are about USD 50,000—increases the mod +15 points. As the claim hits the mod, the insurance premium rises +USDS 24,000 (USD 129,600) and remains in the experience mod formula for three years:
- A USD 50,000 (direct costs) claim actually costs USD 72,000 in higher insurance premiums.
- What’s more, the addition of USD 55,000 in indirect costs brings the claim’s total cost to USD 127,000.
- If the business operates at a 10 percent profit margin, it must generate USD 1,270,000 in additional revenues to absorb the cost of one claim.
Indirect costs paid by the employer and higher premiums created by the increase in mod highlight the reasons the employer must remain proactive in safety improvement. It’s essential to develop claims management strategies and systems to handle workers comp claims. To that end, the business can do more to manage its workers comp exposure in the following ten steps.
Workers Compensation Exposure
Workers compensation insurance premiums are costly. Through an increasing mod, demonstrated in the earlier example, the company effectively pays for workers comp claims. To manage workers comp claims exposure, the business should:
- Create an proactive injury/illness prevention program
- Provide supervisors with safety training and prioritize safety
- Hold safety meetings and ensure attendance at these meetings
- Align the business with an occupational medical provider clinic that is part of the insurer’s Medical Provider Network. Teach staff about the occupational medical provider clinic and instruct staff to go there if a non-emergency injury or accident occurs.
- Consider paying any claim that qualifies as a minor first aid-type injury to avoid increasing mod and premium payments.
- Create and practice the company’s accident response protocol—train people about what to do when an employee injury happens.
- Manage open workers comp claims.
- Compare workers comp broker providers to obtain competitive bids.