The REAL Cost of a Workers’ Compensation Claim

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By Jeff Cavignac, CPCU, ARM, RPLU, CRIS, MLIS
and Meghan Dickerson, CET
© 2013 Cavignac & Associates — All Rights Reserved

Workers’ Compensation insurance pays for occupational injury and illness – that’s why you buy the insurance.  Often times it is an employer’s single most expensive line of coverage.  What many people, however, fail to grasp is that there are significant indirect costs not covered by insurance.  In addition, if your company is large enough to have an Experience Modification, every claim will affect your mod factor and directly impact your costs!

The direct costs of a workers’ compensation claim are pretty straight forward.  Generally speaking, it includes the medical costs and any indemnity (wage replacement) payments. It is this dollar amount that the insurance company will pay to resolve a claim and it is also this dollar amount that will factor in to your experience modification.  Employers, however, also experience significant indirect costs.  According to a study done by the Stanford University Department of Civil Engineering, these indirect costs often exceed the direct costs.  For example, a fracture on average generates direct costs of $50,000.  The indirect costs, however, are estimated at $55,000. 

Indirect costs include, but are not limited to, the following:

  • Any wages paid to the injured employee for absences not covered by Workers’ Compensation
  • Wage costs related to time lost through work stoppage associated with the worker’s injury
  • Overtime costs
  • Time spent by administrators, supervisors, safety personnel and many others who have to handle the claim
  • Cost of hiring and training a replacement worker
  • Lost productivity related to work rescheduling, new employee learning curves and accommodating the injured employee
  • Cost to clean up, repair and replace equipment and machinery damaged by the accident

There could be other indirect costs as well including OSHA fines, third party liability costs, legal fees, worker’s pain and suffering costs and loss of good will. 

You also have to take into consideration the impact a claim will have on your experience modification and your insurance cost. Let’s assume for example that your base premium (before application of the mod and other credits) is $160,000, and you have not had any claims. You will have what is known as a claim free experience modification. The claim free rating is a company’s best possible experience modification for the year the rating is effective. The actual claim free rating is dependent upon the size of the business and variables such as Expected Loss Rates, as determined by the Workers’ Compensation Insurance Rating Bureau.  In our example, the claim free experience mod is 66%, which means your premium for your workers’ compensation policy will be $105,600.

However, this single claim, where the fracture with direct costs is $50,000, will drive your mod up 15 points.  When this claim hits your mod*, your premium will go up by $24,000 to $129,600.  This claim will stay in your experience modification formula for 3 years.  In other words, this $50,000 claim will ultimately end up costing you $72,000 in additional insurance premiums.  In addition to this, you have another $55,000 in indirect costs making the total cost of this claim $127,000!  If your company has a 10% profit margin, you will need to generate an additional $1,270,000 to cover these costs.

The indirect costs you pay and the additional premiums caused by an increase in your experience modification underscore why it is so important to be proactive in your safety efforts and to develop effective claims management strategies to deal with inevitable claims.  Accompanying this article is a list that outlines the 10 things you can do to effectively manage your workers’ compensation exposure. 

Workers’ compensation is more like a finance tool than an insurance policy.  Ultimately, through the experience modification, you will pay for your actual claims.  The only way to lower the cost of workers’ compensation in the long run is to lower the frequency and severity of the claims that are driving those costs.

*Experience modifications are based on your last four years of experience, excluding the current year.  For example, if you renew on January 1, 2014, the experience from January 1, 2010, thru December 31, 2012, will be used in the calculation.

For a more in-depth explanation of Experience Modification, click here.

The Top 10 Things You Need to do to Manage Your Workers’ Compensation Exposure:

  1. Develop a compliant and effective Injury and Illness Prevention Program.
  2. Make certain your supervisors have received the appropriate safety training and that safety is part of their annual review. 
  3. Hold regular safety meetings and make sure they are effective.
  4. Develop a relationship with the right occupational medical clinic that participates in your insurance company’s Medical Provider Network (MPN) and make sure your entire staff knows where to go in the event of a non-emergency accident.
  5. Make sure you pay for any claims that qualify as “First Aid.”
  6. Develop a post-accident response protocol and make sure the appropriate people know what to do in response to an employee injury.
  7. Implement a transitional duty Return to Work Program.
  8. Actively manage any open claims to make certain the treatment is proceeding as it should and the reserves are fair and not excessive.
  9. Understand and manage your Experience Modification.
  10. Choose the right broker.