Costly numbers in workers' comp

Nation's Business, Sept, 1997 by Stephen Blakely

What's in a name? For machine-shop owner George Bartusek Sr., about $75,000. That's the refund he recently received for workers' compensation insurance premiums after he fought for reclassification of his workers at Drill Rod and Tool Steels, Inc., in Franklin Park, Ill.

For years most of his 18 employees had been improperly classified as "iron and steel workers," Bartusek says. By persuading his insurance company to reclassify them more accurately as "precision machinery workers," he collected a decade's worth of premium overpayments.

That change, which took years of persistence and the help of a consultant, also cut Bartusek's annual bill for workers' compensation insurance almost in half.

"Iron and steel workers are the `iron monkeys' who build skyscrapers. But we're a precision-grinding shop, with highly trained machinists doing very close-tolerance stuff," Bartusek says, explaining the radically different nature of the metalworking jobs. Some of his employees are "high-school kids wrapping boxes" as stock handlers, Baytusek says, and the wrong classification forced him to insure them at the same rate as "someone hanging off steel beams 40 stories above the ground."

Bartusek's experience demonstrates why all businesses, large and small, need to pay close attention to how their jobs are classified for workers' comp insurance. Under the workers' comp systems in all 50 states, each job is assigned a particular rating -- and a particular premium -- based on an estimated level of risk. Thus, companies can waste a lot of money if their workers are placed in an undeservedly high risk category.

Similarly, insurance costs will fall below their proper level if a company's workers are assigned an unrealistically low risk category. Such mistakes can lead to a host of other problems that ultimately can jeopardize the financial underpinnings of a state's workers' compensation system.

One example of workers' comp underclassification came to light last November, after an explosion injured 14 employees at a munitions plant operated by Talon Manufacturing Inc. in Alpoca, W.Va. The plant dismantles old military ammunition and recycles the gunpowder. But the state-run workers' compensation fund ranked the firm's workers in the same relatively low risk category as employees at amusement parks and golf driving ranges.

If the company had been classified as "explosive manufacturing and operations," it would have had to pay the state an estimated $1.25 million more in workers' comp insurance premiums since the start of its operations in West Virginia in 1992.

State officials attributed the misclassification to confusion over the company's initial application for workers' comp coverage. The state subsequently created a new category -- foundries and small-arms manufacturers -- for Talon's workers, which raised the firm's annual premium by 39 percent.

Experts say underclassification is one of the reasons that West Virginia has a deficit of about $2 billion in its workers' compensation fund.

"Misclassification is a problem that cuts both ways," says Ed Welch, an East Lansing, Mich., attorney and the author of On Workers' Compensation, a monthly newsletter. Business owners who ignore the issue "end up paying higher premiums," he says, while insurers who don't collect appropriate premiums "have to spread the loss among all employers."

How Classifications Work

At its core, workers' compensation is a state-mandated, no-fault insurance system for workplace injuries and illnesses. By providing workers' comp coverage, employers are shielded from liability lawsuits filed by employees who suffer job-related injuries or illnesses.

In return, workers are assured of coverage for job-related injuries or illnesses -- coverage that includes medical expenses, death benefits, partial recovery of lost wages, and vocational rehabilitation.

The fundamental concept that different jobs have different exposures to injury or illness led to the practice of classifying workers according to risk. The classifications are the starting point for determining how much in insurance premiums a company will pay for each job.

Most job classifications are determined by the National Council on Compensation Insurance (NCCI) in Boca Raton, Fla. The council, established in 1923, is funded by insurance companies and acts as the industry's centralized rating bureau. The organization's classification system is used by 37 states and the District of Columbia, and it often influences the other states, which rely on independent rating bureaus or their own state-run classification system.

Reflecting Differences

The NCCI's classification "bible," known as the Scopes Manual, is a highly specific description and rating of more than 700 types of jobs. The number of classifications has grown steadily as the workplace and the economy have evolved. Software programmers and computerchip makers, for example, got their own classifications in 1992.

The NCCI constantly reviews and changes its manual "to identity those classifications that no longer seem viable and to create new classifications that may be needed," says David Cavanaugh, the NCCI's manager of product underwriting.