• Q: What Is a Business Owners Policy?
  • A: Designed specifically for small businesses, a Business Owners Policy (BOP) is a combination commercial policy that covers property, general liability and business interruption. It is written with strict underwriting guidelines including maximum allowable square footage for office, retail, or apartment risks. A BOP is most appropriate for small, "main street" businesses such as: hardware stores, barbershops, greeting card shops, accountant offices, or low-density apartment houses. Discuss the option of a BOP with your broker-agent, as the premium for qualifying businesses can be very competitive.
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  • Q: What Are Loss Runs?
  • A: Loss runs are reports issued by your insurance carrier that list your company's claims history. These reports must be updated within 90 days of a quote request and are required by most insurance carriers. A favorable report may result in a discount for your policy.
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  • Q: How Are Commercial Policies Rated, Deductibles Selected, and Premiums Developed?
  • A: The way a policy is rated determines how the policy premium is developed. Rating factors vary based on the line of insurance you are purchasing. If you are purchasing commercial property insurance, the building rating formula is based on factors including square footage, type of construction, sprinklered or non-sprinklered, and the fire protection classification. If you are purchasing general liability insurance, the rating formula can be based on square footage, payroll, or gross sales depending on the general liability classification codes used. These are known as rating exposures.
  • Once the rating exposures are identified and the deductibles selected (usually from information you have provided on the application), the premium is calculated by a simple formula: rate x exposure = premium. The deductible amount you choose will be calculated in the rate. The higher the deductible (the amount you choose to self-insure) the lower the rate. By utilizing higher deductibles, you can bring your premium cost down; however, you do not want to jeopardize your company's financial future by choosing overly large deductibles.
  • The basic rating equation most often utilizes other modification factors, which can include experience modifications, schedule rating, or judgment rating.
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  • Q: How Is Workers Compensation Premium Calculated?
  • A: Classification
  • Workers Compensation premium calculation is based upon how employees are classified according to their specific work duties and the rate assigned to each corresponding employee classification. Classifications are developed and assigned by the Workers Compensation Insurance Rating Bureau (WCIRB) in most cases. Workers Compensation insurers working with the WCIRB generally use the classification codes the WCIRB provides when rating a workers compensation policy. Insurance companies are allowed to develop and submit their own classification system to the CDI for approval, but this is uncommon due to the strict standards required to file a separate workers compensation classification system. The WCIRB provides a policyholder ombudsman who is available to answer questions from employers on classification, experience modification, and rating issues. Please see the Resources section for contact information on the WCIRB and their policyholder ombudsman.
  • Open Rating
  • Workers Compensation insurers assign a specific rate to each occupational classification code. These rates must be filed with the CDI. Currently, California Workers Compensation insurers operate under an “open” rating system. This open rating system means that individual companies set rates based on their ability to adequately cover losses and expenses in each classification (occupational business class). Open rating requires that all Workers Compensation insurers file their rates and all applicable supplementary rate information to the CDI. Rate approval is based on many factors. One of the most important factors for rate approval is rate adequacy. Rates must be adequate to maintain the solvency of an insurance company. Adequate rates also act to secure the proper surplus monies insurance companies are required to have in order to meet potential and continuing claim obligations. The Insurance Commissioner will not approve rates if they are inadequate to cover an insurer's losses and expenses, unfairly discriminatory, or create a monopoly in the marketplace. The Commissioner does not have the authority under law to disapprove rates that may be considered excessive only.
  • Premium Modification
  • The classification code with its corresponding rate is the first part of the rating formula. The rate itself is expressed in dollars and cents and is multiplied by each $100 of payroll per classification. The payroll for each class is estimated and then multiplied (per each $100 of payroll) by the applicable rates. The sum of the equation is referred to as the "base" premium. The base premium continues to be modified (increased or decreased) using rating plans (usually schedule or judgment rating) and by experience modification. (Please see the Glossary section for definitions of schedule and judgment rating.)
  • Experience Modification
  • The experience modification is calculated from loss information that an insurance company is required to submit to the WCIRB on an annual basis. The WCIRB uses a mathematical formula approved by the CDI to calculate an experience modification for each employer. The formula takes into account reported paid losses, claim loss reserves, and payroll amounts for a specific experience period (usually the prior three complete years of workers compensation coverage). The experience modification indicates the average loss experience of employers throughout a similar industry and acts as a means of comparison between employers. When the experience modification is applied to the class rate, along with any other modifications (schedule or judgment), the final rate is multiplied per $100 of payroll and the estimated premium is established.
  • Prospective Rating
  • The type of basic Workers Compensation rating formula illustrated above is called prospective rating. While Workers Compensation premiums can be calculated using different rating plans (such as dividend plans or retrospective rating), prospective rating is the most common Workers Compensation premium calculation rating method used currently. Businesses interested in learning more about Workers Compensation rating methods should contact a licensed broker-agent for further information and discussion regarding this topic.
  • Premium Audit
  • The final premium of a Workers Compensation policy cannot be calculated until the policy term is over and the employer's payroll records have been audited. The final audit of payroll records determines if the initial payroll estimate was either high or low. If the payroll has gone up from the estimate, then the employer will owe additional premium. If the payroll has gone down from the estimate, then the insurance company will owe the employer a return premium. Since many companies experience fluctuating payrolls, some workers compensation insurers offer a monthly payroll reporting option. If an employer does not qualify for monthly reporting (usually due to payroll size), then the employer can work closely with their broker-agent or company underwriter to report any large payroll fluctuations during the policy term. Corrected payroll estimates during the policy term can help minimize the possibility of a large premium audit bill or a large return premium, which can significantly affect the cash flow of a business.
  • Employers need to be aware that their Workers Compensation company has the right to audit payroll records at anytime. Usually this right is reserved for the final audit, but an insurance company can conduct interim audits as well. Failure to comply with an insurance company audit can lead to cancellation or non-renewal of a policy. Also, insurance companies can use all legal means at their disposal to collect outstanding premium. It is important to know that deliberate underreporting of payroll is considered insurance fraud and can be prosecuted to the fullest extent of the law. The WCIRB also has the right to conduct an audit of payroll records, which allows them gather information on experience modification and the proper classification categories for a specific employer.
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  • Q: What are the benefits for California Worker's Compensation Insurance?
  • A: Depending on the circumstances of the injury or illness, injured workers are entitled to specific benefits as structured by Workers Compensation insurance. Workers' comp insurance provides six basic benefits. Injured workers may be entitled to one or more of these benefits:
    • Medical care: Paid for by your employer to help you recover from an injury or illness caused by work.
    • Temporary disability benefits: Payments if you lose wages because your injury prevents you from doing your usual job while recovering.
    • Permanent disability benefits: Payments if you don't recover completely.
    • Supplemental job displacement benefits (if your date of injury is in 2004 or later): Vouchers to help pay for retraining or skill enhancement if you don't recover completely and don't return to work for your employer.
    • Vocational rehabilitation (if your date of injury is before 2004): Job placement counseling and possibly retraining if you are unable to return to your old job and your employer doesn't offer other work.
    • Death benefits: Payments to your spouse, children or other dependents if you die from a job injury or illness.

 

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