Insurance Quotes

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Insurers vow ‘muscular’ response to over-regulation

Insurers aren’t known for their aggressive pushback against overly meddlesome regulations. American insurance companies – like any massive industry – have a large lobbying presence. But they tend to tread carefully around regulators for the obvious reason that insurance officials have much power to approve or reject rate hikes, especially in California. It’s dangerous to provoke those who have so much sway over the bottom line.

That’s why this headline in the British-based trade journal, Intelligent Insurer, has caused quite a buzz: “PCI will be muscular as we continue to combat regulatory overreach, says CEO Sampson.” PCI is the Chicago-based Property Casualty Insurers Association of America, which represents “1,000 companies that write 35 percent of the nation’s home, auto, and business insurance market,” according to its web site. CEO David Sampson recently gave some remarks.

The publication summarized them as follows: “A sharp increase in the instances of state regulators making requests for data from insurers is a major cause for concern” for PCI, “adding to an already big regulatory burden and increasing costs at an already challenging time for the industry.” Specifically, Sampson said, “Some of these calls have absolutely no connection to the primary purposes of insurance regulators, which should be to assess the market conduct of insurers and their solvency.”

In July, I authored an R Street white paper that looked at one egregious instance of what Sampson references. California Insurance Commissioner Dave Jones wants insurers who write business in California to divest “voluntarily” from most thermal-coal investments under the guise of protecting insurance companies’ solvency. The department will also publicize companies that don’t comply. The “Carbon Risk Climate Initiative” requires them to answer myriad questions about their investments. Again, the stated goal is to assure solvency.

In reality, Jones seems to be using the agency’s legitimate authority to make sure that insurance companies have the wherewithal to pay any future claims to venture into a dubious crusade that has some fairly obvious political benefits for ambitious politicians. Jones can say he is battling climate change, even though the potential long-term risk of coal-related investments already is reflected in the price of insurance company stocks. Furthermore, as the study pointed out, these investments represent a tiny fraction of the companies’ overall portfolio. In other words, there is virtually no insolvency risk here.

Sampson, as reported by Intelligent Insurer, echoed this point: “The data calls that Sampson cited as being unreasonable include a request by the California Insurance Commissioner for insurers to annually disclose their carbon-based investments including those in oil, gas and coal, and another by five states that required insurers to disclose levels of diversity in their workforce.”

It’s one thing for a think tank to point out the obvious, but another thing for the insurance industry – usually as careful in its public statements as it is in its investment portfolio – to vow to speak out more aggressively against such overreach. “Our members are concerned and have directed us to be more muscular in our approach to pushing back against that trend,” according to Sampson.

The specific approaches noted in the news report were fairly general, so it remains to be seen what this might actually mean. But Sampson’s words were significant enough to garner attention in Great Britain. If the industry follows this up with action, it might even get some attention in Washington, D.C., and even in Sacramento. It’s about time.

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Activity vs Sales – Predicting Producer Success


Sales iQ

Activity vs Sales

Which is the better predictor for producer success?

Many agency principals and sales managers believe that compensation and commissions will motivate their producers. That’s true for those who are motivated solely by money. Many studies show that people, producers included, are motivated by several different influencing factors. Some are positive influencers, some are negative . But they are equally potent, powerful forms of motivation. The most frequent responses to surveys on motivation that ask “What motivates you to perform at work” are:

  • Money
  • Recognition
  • Competition
  • Peer pressure
  • Fear of failure
  • Personal satisfaction- A job well done

To effectively manage and motivate producers, managers need to understand and determine specific motivation factors for individual producers and develop methods of rewarding them in the ways they want to be rewarded.

While CRM systems cannot be used to create personal satisfaction incentives, they can be used to address all other motivation factors listed in some form.

I have come to the understanding that tying compensation to activity to help drive prospecting is a critical non optional behavior that helps create opportunity for success.
  • Posting wins creates recognition
  • Posting activity and results creates peer pressure
  • Both 1 and 2 create competition
  • Lack of activity compared to peers creates a potential fear of failure factor

Agency principals and sales managers are beginning to understand that compensation plans for producers, especially young or newer producers must include compensation based not only on results, but on activity as well. I am a firm believer in tying compensation to activity for young or new producers. It’s also not a bad idea to implement activity based incentives for for experienced producers who’s production has stalled. This will result in plump pipelines, more at bats and, if the experienced pro can close, . . . more new business.

New producers who do not have high activity levels are doomed to fail. I see this consistently when working with new and experienced producers. Activity is a key behavior that develops successful salespeople. Fortunately, activity can be a learned behavior and skill set that managers can easily monitor, measure and instill in producers. Activity is also a yardstick mangers can use to measure performance to make decisions that save years of frustration and hundreds of thousands in wasted resources on producers who won’t prospect and sell. Knowing the importance of activity plays in developing of successful Producers, I suggest you find a method of doing this using your CRM, or Agency Management system. In the absence of these an excel spreadsheet will do nicely.

It’s not difficult or complicated. What I want to measure with respect to activity are 4 things.

# phones calls

# of new business appointments

# of visits with centers of influence or clients for referrals

# of cold calls

Leaders can then run these reports to monitor and compare activity to activity based goals they set for producers. Obviously it’s also important to capture these contacts in your agency data base for use in marketing initiatives and for future follow up.

I have come to the understanding that tying compensation to activity, providing a method for producers to record their activity and monitoring their activity to help drive prospecting are critical non optional behaviors that help create opportunity for success.

Good luck with your producer development!

Your Sales iQ iQ Consulting Inc.

Agency Growth Acceleration

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Infographic: Recap on 2015 Marketing

About Kelly De La Mora

Kelly De La Mora is the Sales and Marketing Coordinator at Wells Media Group, Inc. Having graduated Sonoma State University with a degree in Creative Writing, she likes to write in her free time and also frequent various San Diegan Taco Tuesday happy hours. Fish tacos are preferred over carne asada. She can be reached at 800-897-9965 X125 or

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Negotiation Skills

As agents, we are required to negotiate frequently as a natural course of doing business.

We negotiate every day of our lives with clients, prospects, underwriters,marketing reps, and Agency personnel.

We negotiate on everything from rates to coverage, and from services to deadlines. We also negotiate internally with agency staff to get what we need to win and keep business.If you are like me, they didn’t offer electives on negotiation in college, and you’ve probably never received any formal training or education on negotiation. Most of us have learned basic negotiation skills from the school of hard knocks. The education process has been difficult, frustrating and costly.

Negotiation has been elevated to an art form by guys like Trump and has taken on an almost mystical status. All of these factors, real or imagined have transformed negotiation from a learn-able skill that applies the disciplines of preparation, positioning and strategy into
a “secret discipline” that is understood by only the astute few. Most of us enter negotiations with a pit in our stomach and this hesitancy and fear typically results in poor outcomes. Embracing negotiation, as an effective tool and a learn able skill will significantly improve results, revenue and relationships. Let’s devote a few minutes to review some key concepts and the universal laws of good negotiation.


First: Never enter negotiation without preparation. The preparation Process involves understanding the position and interest of the other party, and then establishing an approach that makes them feel that they are winning or at least not losing. This involves asking questions, taking notes and dis- engaging to prepare.

ALWAYS disengage; think about it, plan, and reengage.

Second: Don’t negotiate too soon. We often give away much more than we need to by negotiating before we’ve been asked to give anything. Understand, that an objection or concern does not require that we go into negotiation mode and begin to give ground.
Last: Don’t lead with price. Always begin negotiation by understanding what it is the other party is wanting, and explore options and alternatives other than price to bring more value, vs. committing to price concessions. The goal is to create an atmosphere of cooperation and a feeling on the part of both sides that we are working together for a win/win solution.
Always start by evaluating potential outcomes, and what each looks like. There are 3 potential outcomes to any negotiation.
Best outcome – Acceptable outcome – Walk away

The goal is always for both parties to walk away feeling like they have not given away too much. The very best way to accomplish this is through transparency and Honest Business Conversations. Honest Business Conversations lead to solutions and to partnership instead of adversarial conversations. Once we have established our objective which should be “What a win -win looks like for us” and we understand the other parties position and interest, we can effectively prepare for the negotiation session.

Key’s to preparation are:
Knowing what win – win looks like – Knowing what a lose looks like for us – Knowing what concessions we are prepared to offer, and what they are worth. – Knowing when to walk away
Anticipation of issues and concerns helps us prepare effective solutions. Anticipation of objections helps us prepare value propositions that lead to more effective, constructive conversations. Think through the potential issues, concerns and objections you uncovered and then think through options and approaches that address issues and objections.
• Rehearse
• Engage
• Introduce considerations
• Use Value Propositions
• Give and take
• Close
Books on negotiation:
Getting to yes – Fisher, Ury
Getting More: Diamond
Difficult Conversations: Stone, Patton, and Fisher

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Millennial Confesses: Insurance is Cool

As a millennial, it appears to me that a majority of anyone outside of this particular generational group possesses a sort of mixed-feeling consisting of fear, intrigue, obsession and annoyance when it comes to us.

It’s like we’re some sort of elusive vampiric (is that a word?) human-creature-night-dweller: only when the moon dully illuminates the night sky in its waning crescent phase do we crawl from our caves, hastily texting on our smart phones while simultaneously asking Siri where the closest pho noodle house is.

A simple search of the word millennial on Insurance Journal online yielded me plenty of results. A few of my favorite are as follows: “Millennials Aspire to Be Workplace Leaders; Seek Training”, “How to Interest Millennials in Insurance Careers”, “Study: Social Posts Provide Clues to Millennials’ Attitudes” and “In the Workplace, What Do Millennials Want?”.

It’s like we’re the actual rainbow fish and the insurance industry is scratching their chin, furrowing their brows, trying to invent the impossible bait to reel us in.

Panicked tone, voices cracking, everyone scrambling to explain the extraordinary amount of worry they have during their monthly company meetings: How do we market to millennials?!?

BIGFOOT SIGHTING—I’m a millennial, and I work (kind of) with insurance.

Correction—I work in insurance advertising. I just wanted to seem a little more exotic/extremely rare saying I worked in the actual insurance industry.

Do I know what the difference is between comprehensive general liability insurance, comprehensive liability insurance, and comprehensive personal liability insurance? Heavens no. Do I tangibly understand the content in the insurance industry-related press releases I schedule? Up for debate. My creative writing degree didn’t necessarily prepare me for the insurance industry rhetoric (or lack thereof).

But if there’s one thing I do know, it’s that my heart drops out of some part of my body it’s not supposed to when I watch my iPhone descend through the air onto the inevitable ending doom that is concrete—a slow motion, heart-breaking consequence of balancing it on top of my packed-to-the-brim purse.

Was that negligence on my part? Putting a fragile, caseless ticking-time bomb of a shattered mess iPhone on top of an already balancing act that is my bag? Well I suppose yes…but you can’t blame me for being in a rush to make it in time for Taco Tuesday happy hour deals at Mi Ranchito, dude! [End millennial use of “dude” here…I promise.]

Ok great Kelly—you’re irresponsible with your iPhone and you like to frequent happy hour deals. What does this have to do with millennials and the insurance industry?

As I performed the simple task of googling “millennials and insurance” [insert eye-roll here from my usage of Google as a verb], I received various results all in agreement with one another. I’ll say it once, I’ll say it again, I’ll say it with everyone else saying it—we don’t really care.

We don’t care about insurance. Car insurance? More like why would I get in a car accident…I’m an impeccable driver. Renter’s insurance? Um…did we invent locks just for looks or…? Oh man don’t even get me started on life insurance. Isn’t time just an invented concept and the only guarantee in life is death?

Alright I think it’s safe to say I’ve been reading too much Nietzsche. But honestly, I believe (and this is me speaking for myself) that we tend to focus on the financial now: bills that mom and dad aren’t fronting anymore, student loans, and buying ripped clothing that my mom doesn’t understand why I purchase if they are already ripped in the first place are EXPENSIVE. And more than likely, we’re newly inaugurated into the real world and don’t have the wealth of money and life experiences to know that things happen, and that we need insurance to help with those inevitable things.

And that’s just insurance in the noun that it is. When talking about the insurance industry and the possibility of millennials working in it, I retrieved some solid google results.

Basically what it came down to was this: we want to be creative. We’re willing to put in the hours (even extra if you can believe it) to be a part of something great. Innovative. With a wow factor. Applicable to our own lives.

Gosh, can’t you just feel the ground rumbling from the thousands of applicants running to San Francisco in the hopes of making their way into a tech start-up? The opportunity to be a building block for an app that allows you to have your own personal butler, someone who runs all your errands for you and delivers them right to your door? The opportunity to say yes, I work for the [insert app name here] app that allows a complete stranger to go make that horrendous Sunday-afternoon-lines-a-mile-long Costco run for you. That’s pretty cool.

But if millennials really deconstructed what they do on a daily basis in conjunction with insurance, they would be horrified at the congruency between the two.

Purchased an iPhone case? You’re insuring that if you drop your phone (whether you’re on your way to a Mexican food cantina for happy hour or not), it hopefully doesn’t break.

Slid your credit card for those $250 Ray Bans? You’re insuring the fact that now you don’t have to annoyingly squint as you’re driving into work every morning. (And you can look cool for all those babes you cruise by, too.)

Brought a jacket with you to the bars? Honestly, that’s a tough insurance policy. Because I’ll be darned if I carry that thing on my arm all night, but also I’ll be more darned if I’m cold.

Along with a jacket, you decided to wear wedge-heels with you to the bars? No, there’s no insurance there. That’s blatant recklessness—you’re going to sprain your ankle.

I don’t think insurance is boring, a waste of money or in any way a waste of my (precious) millennial time. I think it’s that moment you lock your keys in the car—you gasp out loud and twirl around from walking away from your car to realize that they’re sitting on your passenger seat, the same place you threw them subconsciously due to your 8am coffee-less state. But WAIT—you have a hide-a-key tucked away in that filthy space between your back tire and trunk.

That’s insurance.

And to have something have your back is pretty cool. (Just like that personal butler app.)

So, you brave soul who read the entirety of this piece, I ask you this: are you a millennial in the insurance industry yourself? Or are you still at your post outside, binoculars in hand and camera ready to snap that photo of Bigfoot?

[Blowing magical millennial conch shell] Gather around fellow millennials (along with anyone else out there) and let me know your thoughts in the comment box below.

About Kelly De La Mora

Kelly De La Mora is the Sales and Marketing Coordinator at Wells Media Group, Inc. Having graduated Sonoma State University with a degree in Creative Writing, she likes to write in her free time and also frequent various San Diegan Taco Tuesday happy hours. Fish tacos are preferred over carne asada. She can be reached at 800-897-9965 X125 or

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Safeguarding Receivables

This post is part of a series sponsored by Early Warning.

The insurance industry has become a prime target for criminals. Well aware of the money flowing between insurance companies and consumers, scammers continue to find ways to exploit vulnerabilities. Since the vast majority of transactions now take place via ACH, both for payables and receivables, the use of this channel requires insurance companies to take heightened precautions to effectively mitigate risk.

In today’s era of electronic payments, it is critical for insurance companies to protect their receivables processes by properly validating that funds are coming from the correct account that can be validated to the policyholder. Herein lies the primary challenge. Without the ability to determine exactly where received funds initiate, insurance companies are susceptible to fraud as well as the overhead associated with insufficient funds (NSF) and other administrative and authorized transaction returns.

This issue creates a significant burden for an insurance company’s receivables department. Not only does it need to verify accounts at the time of a policyholder’s ACH enrollment, it also needs to validate that funds coming in are “good funds” that can be used. This comes into play any time an organization is collecting either one-time or recurring payments; or, if an established customer changes his or her account, payments should be re-validated.

As insurance companies continue exploring new ways to safeguard their organizations and their customers from fraud, it is not sufficient to validate receivables in a one-off fashion. Rather, they need solutions that can consistently provide account status and ownership confirmation. Insurance companies should not allow instances of NSF or administrative tasks to take away from core business objectives or customer service or create fraud susceptibilities. Instead, they must capitalize on solutions that can seamlessly authenticate policyholders and accounts on the front end, before even giving high-risk payments a chance to occur.

Many insurance companies are looking to technology to ensure they are interacting with legitimate accounts and the correct policyholders. Early Warning understands that authenticating accounts and ensuring good funds is more than a common issue, but an everyday matter. Early Warning’s Real-Time Payment Chek® Service with Account Owner Authentication (AOA) is aiding insurance companies to quickly confirm account ownership and verify whether accounts are open and in good standing, leveraging the collaborative intelligence of the National Shared Database℠ Resource.

Real-time Payment Chek Service with AOA provides value to insurance companies by answering two key questions at the point of transaction to immediately match the account owner and signatory details.

As a result of using technology and taking a proactive stance, insurance companies can effectively mitigate risk and reduce ACH returns and unauthorized transactions. At the same time, they can provide their customers with a much better experience; ACH enrollment is faster and employees can dedicate more time to customers’ needs instead of managing back office returns and collections.

To learn more, click here to download the solution brief.

Watch for our next blog, October 5th, which will showcase how Real-time Payment Chek Service with AOA optimizes payables for insurance organizations by reducing claims payment fraud.

About David Barnhardt

David Barnhardt is Early Warning’s Vice President of Product Management where he oversees development and management of deposit and payment solutions. He joined Early Warning in 2014 bringing with him thirteen years of executive experience in bank fraud and risk management. During his career, he has done extensive work in mitigating deposit, debit, e-commerce, and internal fraud. He has also done significant work in link analysis and collusive ring investigation.

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Audit Problems Leading to Additional Premiums

Let’s dispense with the niceties and all attempts to eloquently ease into a discussion on the troubles surrounding workers’ compensation audits. Rather let’s jump right into the problem — assignment of “employee” status to non-employees. This is not the only problem, but this is where most additional premium headaches seem to originate.

Statutes in most jurisdictions are rather clear regarding who is and is not an employee, but auditors have taken it upon themselves, on many occasions, to assign an individual “employee” status in direct contradiction to statutory language; particularly when it comes to sole proprietors, partners, corporate officers, properly insured subcontractors and true independent contractors. Worse yet, different carriers’ audit departments treat the same exposure in different ways, which leaves agents to guess on the outcome. Guessing usually ends with the client being stuck with an additional premium bill and the loss of a client.

In one instance, an agent was sued by his insured to recover the amount of the additional premium audit (in the neighborhood of $75,000 to $80,000) resulting from independent and statutorily exempt subcontractors being assigned “employee” status. The insured claimed the agent never advised him which workers might and might not be considered employees and thus the agent erred in his professional responsibility and duty to the insured. Even if no lawsuit had been filed, the client will likely move his coverage at renewal (or sooner), even if the audit is right.

Challenging an auditor’s ruling seems to be a no-win proposition akin to tilting at windmills. Some underwriters have stated that they cannot overrule the auditor; and even the states seem to be or choose to be impotent in a classification dispute.

Before completely ripping auditors apart, let’s agree that good auditors can be a valuable resource when working on a difficult account. Some company auditors will even take the time to help agents classify the insured (which could possibly help win an account). I have had occasion to establish an up-front agreement with the auditor regarding a particular insured’s classification at audit. Auditors who go above and beyond need to be recognized to their managers and the manager’s manager. Bosses generally hear nothing at all or bad reports, a good report will stand out in their mind and the auditor will be an ally later.

To be fair, the auditor’s job is not always easy, and sometimes it is hard. Judging who is and is not an employee is not always clear. When there is a gray area, the auditor generally takes the conservative approach and assigns “employee” status. The bad part is the agent doesn’t generally find out until receiving the angry call from the insured holding the audit bill in his hand. How the auditor is approached once the audit is contested goes a long way towards amiably rectifying any problems.

Regardless, the agent needs to protect himself or herself from the sufficiency of gray area that may lead to an additional premium audit. Employee status in workers’ compensation is a function of law, not a function of the policy, and since agents are not generally lawyers, the best they can do is make an educated interpretation — but even that might be wrong.

Stuart Powell, CPCU, CIC, CLU, ARM, ChFC, AMIM, AAI, ARe, former vice president of Insurance Operations for the Independent Insurance Agents of North Carolina, crafted a letter for agents to send to their clients upon purchase or renewal of a workers’ compensation policy. This well-written letter explains to the client what workers’ compensation is, how it is priced, how employee status is determined and what will happen at audit.

The Letter

Insured Addressee Business Name Street Address City, State Zip

Re: Workers’ Compensation Policy

Dear Client:

You recently purchased (or renewed) a Workers’ Compensation and Employers’ Liability Insurance Policy. This policy is designed to support and comply with (this state’s )Workers’ Compensation Laws and to provide benefits as prescribed by statute to any injured employee whose injury or disease “arises out of and in the course and scope of” their employment.

Payroll generally determines the ultimate cost of coverage. Estimated payroll supplied by you at the beginning of the policy year determines the deposit premium. An audit of actual payrolls is completed by the carrier at the end of the policy period to determine the final premium. If actual payroll is less than your estimate, a premium refund may be sent. Likewise, actual payroll higher than estimated results in an additional premium bill.

Today’s business climate makes it difficult to determine who qualifies as an “employee;” the use of leased employees, subcontractors and independent contractors contributes to the confusion. Employment contracts, statute or common law usually establish employment (and employee) status. Calling a worker by a name other than employee (i.e. “subcontractor” or “independent contractor”) does not overcome the facts. Additionally, how compensation is reported to the IRS (use of a 1099 Form) is not sufficient to establish that the individual is not, in fact, an employee.

Workers’ compensation pays benefits to injured “employees;” any individual determined by statute or the court to be your employee is entitled to benefits. Because benefit payments are the responsibility of the insurance carrier, they are becoming very aggressive in making sure you pay the proper premium for the benefits they must provide. Insurance company auditors have traditionally allowed the use certificates of insurance to establish exemption from “employee” status. Recently, auditors have begun to disregard these certificates particularly in cases of workers’ compensation “ghost” policies (a workers’ compensation policy written for an unincorporated business with no employees and which does not extend coverage to the business’ owner(s)).

Additionally, workers that perform the same tasks employees perform or would perform may lead the auditor to define such individuals as employees, resulting in additional premium based on the individual’s compensation. These are workers you might label as “independent contractors” or “subcontractors.” Depending on the number of workers in question, the premium adjustment could be substantial.

An opinion from an attorney trained in employment law is required to answer any questions about the status of a particular worker or group of workers. We as your agent appreciate the opportunity to assist you in your workers’ compensation insurance program; however, we are not attorneys and are unable to provide a legal opinion as to whether a particular worker is or is not a statutory or common law employee.

Sincerely yours,

Your Agent


Keeping other agents and clients informed allows a better system to be built. Communicating with clients up front also avoids some heartburn in the end.

Workers’ Compensation Series

This is the last in a series of articles on workers’ compensation. The series is taken from the book, “The Insurance Professionals’ Practical Guide to Workers’ Compensation: From History through Audit.” The articles in this series are:

  • Workers’ Compensation History: The Great Tradeoff
  • Benefits Provided Under Workers’ Compensation Laws
  • Second Injury Funds: Are They Still Necessary or Just a Drain On the System?
  • Employees Exempt from Workers’ Compensation
  • Nonemployee ‘Employees:’ The Borrowed Servant Doctrine
  • Work Comp for PEOs and Their Client/ Employers
  • Combinability of Insureds
  • Audit Rules and Guidelines
  • Audit Problems Leading to Additional Premiums

About Christopher J. Boggs

Boggs, CPCU, ARM, ALCM, LPCS, AAI, APA, CWCA, CRIS, AINS, is a veteran insurance educator. He is Executive Director, Big I Virtual University of the Independent Insurance Agents and Brokers of America. He can be reached at More from Christopher J. Boggs

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Audit Rules and Guidelines – Part II

Part I of this two-part audit rules and guidelines article presented the section of the work comp policy making the audit possible. It also presented what remuneration was included and what was excluded for premium audit purposes.

Part II details the governing classification and single enterprise rules (including exceptions) and ends with the ABCs of premium audits (which can be applied to any premium audit).

Governing Classification and the Single Enterprise Rule

Once final payrolls are calculated, a “Governing Classification” is assigned to the employer. The governing classification is generally based on the class code generating the largest payroll; rarely the highest rated code is used as the governing class (usually only used in construction-related operations if used at all). All employee payrolls, with certain exclusions and exceptions expounded upon in upcoming paragraphs, are assigned to the governing classification.

The governing classification is intended to represent the exposure created by the overall operational business, not the exposure of each individual employee. Applying the single enterprise rule, the governing classification is designed to anticipate all the normal activities conducted by a particular operation or business. For example, a steel fabrication plant may have employees that rivet, others that bend and shape the steel, others that paint the finished product and still others that add braces and brackets. Even though there are different exposures presented by each of these operations, all payroll is assigned to the same class code – the one that represents the overall exposure.

Further, there are some activities a business conducts that appear to be so unrelated to the primary operations as to require or allow separate classification be assigned. However, NCCI considers some of these activities to be an integral part of the business’ operations thus the payroll of the individuals engaged in these activities is included in the governing classification. Known as “General Inclusions” these included activities are:

  • Employees that work in a restaurant, cafeteria or commissary run by the business for use by the employees (this does not apply to such establishments at construction sites);
  • Employees manufacturing containers such as boxes, bags, can or cartons for the employer’s use in shipping its own products;
  • Staff working in hospitals or medical facilities operated by the employer for use by the employees;
  • Maintenance or repair shop employees; and
  • Printing or lithography employees engaged in printing for the employer’s own products.

Payroll for any employee engaged in the above activities is assigned to the governing classification.

Exceptions to the Governing Classification Rules

There are four exceptions to the governing classification and single enterprise rules. These are:

  • The “Standard Exception” classifications;
  • The “Interchange of Labor” rules;
  • The “General Exclusion” classes; and
  • Employers eligible for classification under the “Multiple Enterprise” rule.
‘Standard Exception’ Classifications

Some duties/activities are so common to most business and may be so far outside the operational activities of the entity that employees engaged in these positions are considered exceptions to the governing classification rules. Payroll for these “standard exception” classes of employees is subtracted from the governing classification and assigned to the applicable standard exception code and rated separately from the governing class. The standard exception classes include:

  • Clerical Employees- Class Code 8810;
  • Clerical Telecommuter – Class Code 8871;
  • Drafting Employees – Class Code 8810;
  • Salespersons – Class Code 8742; and
  • Drivers – Class Code 7380.

For a particular employee or group of employees to qualify for assignment into one of the standard exception classifications, he/she must be physically separated from the operative hazards of the business by means of walls, floors, partitions or counters. Such separation requirement does not negate the assignment of an employee to a standard exception class if he is only entering the area of operation to conduct duties consistent with his class code; such as a clerical employee entering the operations area to deliver paychecks.

Standard exception classifications are not necessarily limited to these five class codes; some states utilize state-specific class codes that are also eligible for assignment as a standard exception. For example, Texas allows certain employees to be assigned to “Executive Officers NOC” (class code 8809) and the payroll for these employees is pulled out of the governing classification and rated as a standard exception.

Employees falling into a standard exception classification may not always be eligible for “standard exception” separation. Attention must be given to the governing classification description; at times, the governing classification may state “…&…” or “…including….” If such wording appears, the payroll for the standard exception employee is included in the governing classification. The reason for such inclusion, the analogy of that particular operation requires the presence of the standard exception employees to accomplish the goals of such business. A few examples of this include (not an exhaustive list):

  • Farm: Nursery Employees & Drivers (Class Code 0005);
  • Chemical manufacturing NOC – all operations & Drivers (Class Code 4829);
  • Carpet, rug or upholstery cleaning & Drivers (Class Code 2585);
  • Physicians & Clerical (Class Code 8832);
  • Photographer – All employees & Clerical, Salespersons and Drivers (Class Code 4361); and
  • School: Professional Employees & Clerical (Class Code 8868).
Interchange of Labor

A second exception to the governing classification rule is the “interchange of labor” rule. The applicability of this rule varies by state; some states only allow its use in the construction, erection or stevedoring classes of business while other states permit the interchange of labor rule to apply to any type of business operation.

Interchange of labor rules allow a single employee’s payroll to be split between or among several class codes that may be present within the operations. The advantage to the employer (premium payer) of such allowance is an ultimately lower premium. Without the interchange of labor rule, the employee’s entire payroll would be assigned to the governing (likely highest rate) classification. With the interchange of labor rule in effect, the employer is charged based on the employee’s actual exposure to injury.

For instance, an employee in the construction industry who does framing work (5645) and hardwood floor installation (5437) can see his payroll divided between these different operations and realize a reduction in premium provided the following specific provisions are met:

  • All classifications used for an employee are appropriate to the job performed;
  • Payroll records exist that allocate the employee’s wages between/among the different classes. This requires an actual, dollar amount payroll split, a percentage of payroll is not allowed;
  • The division of payroll is not available with any of the standard exception classifications (with the possible exception of the driver code); and
  • The operations/activities are not conducted on the same job site.

Continuing the above example using assigned risk rates of $25 for code 5645 and $14 for code 5437, an employee earning an annual payroll of $30,000 will cost the employer $7,500 if there is no interchange of labor. If, however, all the interchange of labor guidelines are met, and the employee’s payroll is split as follows: $20,000 for framing and $10,000 for hardwood floor installation; the employee will only cost $6,400 in workers’ compensation premium (ignoring expense constants, modification factors and debits or credits).

The interchange of labor rule is great for the employer due to the premium savings and is fair for the insurance carrier because exposures differ based on activity. When the employee is on scaffolding he is more like to suffer a severe injury than when installing flooring.

Employers and their agents must understand and take advantage of the interchange of labor rules allowed in each state. Large payrolls can greatly benefit from such splits thus agents should encourage detailed payroll records be kept and the audits should be checked closely.

General Exclusion Classifications

Some operational activities do not fit into the analogous assignment of the governing classification due to the unexpected existence of such an operation as part of a particular business. It is not reasonable to expect the hardware store code (8010) to pick up the exposure created by an onsite sawmill operation (2710) for example.

Such operations are known as “general exclusion” classes. General exclusion classes are listed separately on the workers’ compensation policy and a separate rate (based on the class code) is charged for the employees within these classes of operations.

General exclusion classes are the opposite of “standard exception” classes. General exclusion classes are completely unexpected and not considered part of the analogy of the governing classification of an operation requiring separation to allow the insurer to garner the, usually, higher premium for the increased exposure. Conversely, standard exceptions represent operations common to most business and are of such minimal hazard that the insured should not be punished by having the payroll for these classes included in the governing classification, but should rather enjoy a lower premium for the reduced exposure.

Operations and activities falling within the general exclusion classification are:

  • Employees working in aircraft operations;
  • Employees performing new construction or alterations;
  • Stevedoring employees;
  • Sawmill operation employees; and
  • Employees working in an employer-owned daycare.
Multiple Enterprise Rule

The single enterprise rule requires that all activities usual and customary to a particular operation be assigned to one “governing” class code (with the exceptions described above). However, a particular entity may conduct additional operations not usual or customary to such an enterprise; such disparate activities may allow the insured to qualify for the separation of payroll into multiple classifications under the “multiple enterprise rule.”

A secondary operation producing a basic premium equal to or higher than the governing class code (the “governing class code” is the code generating the highest payroll) premium automatically qualifies for separation under the multiple enterprise rule with the only requirement being segregation of payrolls.

If, however, the basic premium generated by the secondary operation is less than the governing class code basic premium, four tests must be satisfied before the insured can make use of the multiple enterprise rule. These are:

  1. The operation is not commonly found within the operation of the subject insured’s business;
  2. The operation could each exist as a separate entity;
  3. Financial records are kept separately for each operation; and
  4. The operations are physically separated by means of a partition, wall or placement in a separate building.

Such separation of payrolls may benefit the insured employer by a reduction in premium if the secondary enterprise carries a lower rate per $100 of payroll. Additionally, employers that qualify for separation of payrolls under the multiple enterprise rule may also be able to benefit from the application of the interchange of labor rule as presented above and based on the state.

ABCs of Premium Audits

There are specific guidelines that agents and the employer should apply to every audit. These are the “ABCs” of premium audits.

A: Always be there. A representative from the company familiar with the financial records and the operations should be present at every audit. The auditor will likely have questions and unless someone is available to answer these questions and explain the financial documents, the auditor will have to make some potentially costly assumptions and/or mistakes. This duty should not be delegated to any member of the staff not intimately familiar with the business and its finances.

B: Be prepared. The auditor needs all the necessary financial records to conduct the audit and will likely ask for a tour of the facility. Prepare a place for the auditor to work and help them complete their job as quickly as possible. Have ready or available:

  • Payroll records: Payroll journal and summary; 941s; state unemployment reports; an explanation and break out of overtime payments; and the general ledger.
  • Employee records: Include a detailed description of job duties; the number of employees; employee hire and fire dates; and class code splits if applicable.
  • Cash disbursements: Cost of and payments to subcontractors; cost of materials; and the cost of any casual labor hired.
  • Certificates of Insurance: Make sure to supply current certificates of insurance covering the entire period of the audit or the entire period of time the contractor has worked for the insured. If the sub’s policy renews in the middle of the audit period, a new certificate should be requested covering the remainder of the insured’s policy period.
  • OCIP projects: If the insured has been a part of any wrap-up, the auditor needs this information in order to remove the payroll from the calculation.

C: Copy of the auditor’s work papers. Don’t let the auditor leave without getting a copy of the audit work papers. This allows the insured and the agent to review the audit and confirm that there are no errors BEFORE the audit is processed and billed (fixing it “after-the-fact” is more difficult).

D: Don’t volunteer more information than asked. The auditor will ask questions, this is expected. Insureds should be advised to only answer the questions asked and not lead the auditor down a path that may be detrimental to the insured.

E: Exceptions to the single entity rule. The exceptions listed above should be capitalized on by the insured. Audits should, at the very minimum, contain at least one standard exception code. If the insured is eligible for any of the other payroll splits described above, those codes should also be included.

Knowing the rules and exceptions, giving the auditors everything they need to complete the audit quickly and following the above rules increases the chances of a correct and favorable audit.

Workers’ Compensation Series

This is the tenth in a series of articles on workers’ compensation. The series is taken from the book, “The Insurance Professionals’ Practical Guide to Workers’ Compensation: From History through Audit.” The articles in this series are:

  • Workers’ Compensation History: The Great Tradeoff
  • Benefits Provided Under Workers’ Compensation Laws
  • Second Injury Funds: Are They Still Necessary or Just a Drain On the System?
  • Employees Exempt from Workers’ Compensation
  • Nonemployee ‘Employees:’ The Borrowed Servant Doctrine
  • Work Comp for PEOs and Their Client/ Employers
  • Combinability of Insureds
  • Audit Rules and Guidelines
  • Audit Problems Leading to Additional Premiums

About Christopher J. Boggs

Boggs, CPCU, ARM, ALCM, LPCS, AAI, APA, CWCA, CRIS, AINS, is a veteran insurance educator. He is Executive Director, Big I Virtual University of the Independent Insurance Agents and Brokers of America. He can be reached at More from Christopher J. Boggs

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Audit Rules and Guidelines – Part I

Workers’ compensation coverage is initially priced on an estimated basis. The insured estimates payrolls (and sometimes class codes) at the beginning of the policy period for the upcoming year on which the insurance carrier charges a premium using the prescribed rates. After the close of the policy year, the insurance carrier desires to firm up the numbers to confirm collection of the actual premium earned for the actual exposure insured. This “firming-up” is known as the premium audit.

Premium audits are addressed by Part Five, paragraph G., of NCCI’s Workers’ Compensation and Employers’ Liability Insurance Policy. The form reads as follows:

G. Audit: You will let us examine and audit all your records that relate to this policy. These records include ledgers, journals, registers, vouchers, contracts, tax reports, payroll and disbursement records, and programs for storing and retrieving data. We may conduct the audits during regular business hours during the policy period and within three years after the policy period ends. Information developed by audit will be used to determine final premium. Insurance rate service organizations have the same rights we have under this provision.

Premium Basis

Premium, with rare exception, is based on payroll, also known as “remuneration.” Below are the common remuneration inclusions and exclusions:

Remuneration Included:
  • Wages/Salaries;
  • Commissions – If on draw, and draw is greater than commissions earned — use the entire amount of the draw;
  • Bonuses, unless awarded for individual invention or discovery;
  • Overtime – One-third of amount is subtracted from the total amount (one-half if it is double-time pay);
  • Pay for holidays, vacations, or periods of sickness;
  • Pay for time not worked (i.e., paid for an 8-hour day when only 7 hours worked);
  • Pay for travel time to or from work or specific job site;
  • Employer payments of amounts otherwise required by law (i.e., Statutory insurance, Social Security, etc.);
  • Contributions to a savings plan or vacation fund required by a union contract;
  • IRS Qualified Salary Reduction Plan (i.e. 401K) (refers to the employee’s contribution and any qualified agreement between the employer and the employee to pay into a retirement plan in lieu of direct wages);
  • Employee Savings Plans – Only the amount given by the employee, not the employer’s match, if any;
  • Contributions to an IRA made by the employee;
  • Payment on any basis other than time worked such as piecework, incentive plans or profit sharing plans;
  • Payment or allowance for tools;
  • Value of housing/lodging;
  • Value of meals; and
  • Substitutes for money (merchandise certificates, store credit, etc.).
Remuneration Excluded:
  • Tips and other gratuities;
  • Payments by employer to Group Insurance or Pension Plans (employer matching);
  • Special rewards for individual invention or discovery;
  • Severance pay;
  • Pay for those on active military duty;
  • Employee discounts;
  • Expense reimbursements;
  • Money for meals for overtime work;
  • Work uniform allowance;
  • Sick pay paid by a third party; and
  • Employer-provided perks (company autos, incentive vacations, memberships).

Special Payroll Considerations – Sole Proprietors, Partners, LLC Members and Executive Officers

Actual remuneration for each employee is used in the calculation of the final workers’ compensation premium with just a few common exceptions. Sole proprietors, partners, LLC members and executive officers are treated differently than regular employees.

Sole proprietors and partners in states that allow these persons to choose to be subject to the workers’ compensation law and thus covered by the policy are generally assigned a payroll regardless of his or her actual gross income. This amount is adjusted annually to account for inflation and other cost of living factors. Each state allowing these individuals to “opt in” assigns its own payroll limit (the amount not the same throughout the country).

Executive officers are generally subject to an upper and lower weekly payroll limit rather than a set annual payroll. If, for instance, the minimum weekly payroll assignable to an executive officer is $331 per week ($17,212 per year) with a maximum weekly payroll of $1,300 per week ($67,600 per year); an executive officer paid $300,000 per year will appear on the audit at $67,600 per year. Remember, not all officers are executive officers. Executive officers are generally limited to the president or CEO, the CFO and certain levels of vice presidents. The delineation is a function of the articles of incorporation and can vary from entity to entity.

Members and managers of an LLC are, once again, subject to state laws. Some states treat these individuals as sole proprietors/partners while others view them as executive officers. The subject law should be reviewed to confirm how these individuals are classified and thus how payrolls are assigned based on the descriptions above. Likewise, proper assignment of the founders/organizers of a professional association (PA) is subject to individual state statutes.

Three operational and actuarial reasons for such payroll limitations are:

  1. Getting paid more does not increase the likelihood that an injury will occur. A plumbing company executive officer actually engaged in plumbing work and earning $150,000 per year is no more likely to get hurt than the $15 per hour “plumber’s helper.” In fact, he is probably less likely to get hurt due to experience and personal interest. The amount of pay does not increase the chance of injury;
  2. Medical costs, theoretically, don’t fluctuate based on the individual’s income. A broken leg costs the same to set for the owner and the hourly employee;
  3. Indemnity payments are limited to a minimum and maximum in each state. Each state sets the minimum and maximum weekly indemnity benefits. If the maximum that an injured executive or employee can receive in any given year is $75,000 (just for example sake), it is not reasonable to expect the insured to pay a premium based on a gross income of $200,000. This operational rule is combined with the previous two to limit the amount of payroll assignable to these special classes of people.

Continued in Next Post

Part II of this series-within-a-series focuses on and explains the:

  • Governing Classification and Single Enterprise Rule; and
  • ABCs of Premium Audits.

Workers’ Compensation Series

This is the ninth in a series of articles on workers’ compensation. The series is taken from the book, “The Insurance Professionals’ Practical Guide to Workers’ Compensation: From History through Audit.” The articles in this series are:

  • Workers’ Compensation History: The Great Tradeoff
  • Benefits Provided Under Workers’ Compensation Laws
  • Second Injury Funds: Are They Still Necessary or Just a Drain On the System?
  • Employees Exempt from Workers’ Compensation
  • Nonemployee ‘Employees:’ The Borrowed Servant Doctrine
  • Work Comp for PEOs and Their Client/ Employers
  • Combinability of Insureds
  • Audit Rules and Guidelines
  • Audit Problems Leading to Additional Premiums

About Christopher J. Boggs

Boggs, CPCU, ARM, ALCM, LPCS, AAI, APA, CWCA, CRIS, AINS, is a veteran insurance educator. He is Executive Director, Big I Virtual University of the Independent Insurance Agents and Brokers of America. He can be reached at More from Christopher J. Boggs

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