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Five Work Comp Errors Every Agent Makes

Author: Chris Boggs

Workers' compensation, from a coverage standpoint, is the simplest coverage to understand and even explain. However, statutes and common laws serve to complicate the initial simplicity of workers' compensation.

Complexity breeds errors. Five of the most common workers' compensation errors agents make revolve around:

  1. Understanding who the insured is responsible for protecting via a workers' compensation policy;
  2. Realizing that legal entity type affects who counts as an employee;
  3. Correctly managing the exposures created by travelling employees;
  4. Understanding combinability; and
  5. Preparing clients for the premium audit.

Although this list does not present all the possible mistakes agents make when writing workers' compensation, these are the most common.

Who is the Insured Responsible for Protecting?

Insureds are potentially responsible for providing workers' compensation benefits to potentially four types of individuals (employees):

  1. Direct employees. A “direct employee" is a person hired to perform certain services or tasks for particular wages or salary under the direct control of employer. These individuals are generally found on the insured's payroll records.
  2. Employees of uninsured subcontractors (“de jure" employees). Forty-four states and the District of Columbia statutorily require an upper tier contractor to provide workers' compensation benefits to the employees of an uninsured lower tier contractor. Essentially, these are employees because the law says they are.
  3. De Facto employees. Calling someone an “independent contractor" does not necessarily make it so. Even if the individual is an “independent contractor" by IRS standards, they may still be considered an “employee-in-fact" under workers' compensation guidelines and laws. The facts of the relationship must be known. The key component of a de facto employee is control; how much control does the hiring party (employer) have over the worker (employee)? The more control over the worker's ways and means, the more likely the worker is a de facto employee.
  4. Borrowed servants are direct employees of one entity working under the direct control of another entity. Although this is a dual employment situation, when the worker gets hurt, the courts look at who was in control of the worker. This type of employee/employer relationship may require attachment of the Alternate Employer Endorsement to avoid “issues" at the time of the injury. 

How Entity Types Affects Who Counts as an Employee

Deciphering status as an employee is first a function of who qualifies as the employer. Two key points to consider when differentiating between an employer and an employee in workers' compensation: 1) The employer is generally not required to be protected by workers' compensation; and 2) The employer is always a “person."

What is meant by, “the employer is always a person"? Remember, in law there are two types of persons:

  • Natural persons: Flesh and blood individuals generally exampled by sole proprietorships, partnerships and LLCs in a majority of states (33 or 34); and
  • Legal persons: These are “persons" created by law. They are born by the filing of articles of incorporations or articles of organization. Examples include corporations, professional associations and LLCs in 16 or 17 states. It appears LLCs qualify as legal persons in Missouri. 

With that as background, pinpointing who qualifies as an employee is easy. An employee is any natural person not qualifying as the employer.

Entity TypeWho is an Employee?
Sole Proprietorships:Everyone other than the sole proprietor;
Partnerships:Everyone other than the partners;
LLC:It depends on the state. In a majority of states, an LLC is treated like a sole proprietor or partnership and everyone but the members and/or managers are considered employees. Some states treat LLCs like corporations making everyone an employee (even the members and/or managers)
Corporations, Professional Associations:Everyone is an employee (even the “owning" corporate officers).

Managing the Exposure of Travelling Employees

When employees travel to other states to work on a temporary basis, the potential to create workers' compensation coverage gaps, up to and including no coverage, is very real. Coverage gap problems live at the junction of two key concepts: 1) Extraterritoriality and 2) Reciprocity.

Extraterritoriality relates to and is a function of the state from which the employees leave to perform work, let's call this the “sending" state. The concept of reciprocity applies to the state to which the employee travels to work, this can be referred to as the “receiving" state. Agents must know the answers to specific questions to assure coverage is in place for travelling workers:

  • Extraterritoriality: Does the “sending" state's workers' compensation coverage follow the employee when he/she leaves the state to work? If so, are there any specific limitations on the extraterritorial benefits? Every state provides extraterritorial benefits; but each state grants coverage to a different degree. The VU developed a spreadsheet to address each state's law, it can be linked from here.  
  • Reciprocity: How does the “receiving" state view the workers' compensation coverage from the “sending" state? Essentially, to answer the reciprocity question, you have to know the answer to two other questions: 1) Does the receiving state's workers' compensation law have jurisdiction over employees travelling into the state? and 2) Do the extraterritorial benefits of the workers' comp policy from the sending state satisfy the receiving state's workers' compensation statutes? Most states do not reciprocate at some level. Some don't reciprocate at all; some reciprocate unless the insured is in certain class codes (generally construction); some states on reciprocate if there is mutual reciprocation; and some states do not reciprocate based on the number of workers in the state or the length of time in the state. Link to the breakdown of each state's reciprocity position from here

Combinability in Workers' Compensation

Consolidating the loss experience of separate legal entities to develop a common experience modification factor has the potential to cause confusion for the client and sometimes the agent. Especially when you consider that combinability rules do not merely marry the experience of related entities currently in operation, they also assure that owners do not avoid historically poor loss records simply by closing down one entity and reopening and operating under another corporate name.

Common majority interest (not just ownership) is the basis for combinability. "Common majority interest" can be accomplished applying one of several relational constructs:

The corporation (a “legal person") owns a majority interest in other entities;

The business' owner(s) ("natural person(s)") individually or collectively maintain majority interest in more than one entity;

The corporation combines with some or all of its owners to hold a majority interest in another entity; or

The business owns a majority interest in another entity which, itself, owns or owned a majority interest in a third entity currently operating or which operated in the last five years.

Agents don't have the responsibility of deciding which entities are combinable, only the responsibility of notifying the authority having jurisdiction that entities may be combinable. Once the ERM-14 is complete, the authority having jurisdiction makes the final decision.

Preparing Clients for the Premium Audit

To garner the best results, teach insureds to follow these “ABCs" of premium audits:

  • Always be there: Don't push responsibility for working with the auditor down to the lowest possible level employee.
  • Be prepared: Have all the records ready before the auditor arrives. This includes:
  • Payroll Records
  • Employee Records
  • Cash Disbursements
  • Certificates of Insurance
  • OCIP Project Data
  • Get a copy of the auditor's work papers
  • Treat the auditor well
Bringing it Together

Workers' compensation, as one of the few statutorily mandated coverages, is deceivingly simplistic. Yes, the basic premise and even the coverage form are easily understood, but the practical application of statute and common law to workers' compensation requires close attention to how the policy is constructed assure the best results for the insured.

ABEN is the provider for the  Big "I" Virtual University's CE courses. They offer a 2-hour webinar explaining all five of these topics in much more detail. Click here to learn more. 

Last Updated: January 27, 2023

Originally Posted: November 9, 2020


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