For example, in many kinds of businesses, such as manufacturers, it is the overall business enterprise that gets classified, not all the various kind of work done within a business.

Except for those "Standard Exceptions" like clerical work, which normally does get assigned a separate class. Same for outside salespeople.

And there are what are called Standard Inclusions--things that don't get broken out into a separate classification but instead are lumped into whatever the main, or Basic Classification, is for the business. Maintenance workers are a Standard Inclusion, as are shipping and receiving people. So a janitor at a tire manufacturing plant would get lumped into the tire manufacturing class, while a janitor at a machine shop would go into the machine shop class.

Basic Classification is almost, but not quite, the same as Governing Classification. Governing Classification is whichever class on a policy contains the most policy.  For many kinds of businesses it is the same as their Basic Classification. Sometimes, though, a business may have more than one Basic Classification, if the business includes disparate operations that meet certain requirements.

But the details can be tricky--there are a few kinds of businesses that aren't eligible for having clerical workers broken out in a separate class.

And there are some General Exclusions as well--things that companies may do that are required to be broken out into separate classifications, things like aviation, new construction, day care operations, or a sawmill.

Incorrect classification of workplace exposures is one of the most common mistakes that A.I.M. finds and corrects for clients. 

For example, how about a worker who just goes out and does estimates for roofing work? In most states, NCCI says those workers also go into the roofing class code 5551 (particularly if they have to go on a roof as part of that work.)

But not all non-NCCI  states agree about that. Even some NCCI states can disagree about such details.

 Remember that even among NCCI states there can be what are called "State Special" rules about some classifications, so in those states the details of which workers get put into a particular classification can vary.

Even the Code number may vary, with the use of State Specials.  And again, some states don't use the NCCI system (although most do.)

Again, in most states, the classification system used is one devised and maintained by NCCI, the National Council on Compensation Insurance. NCCI is an independent organization, an "Advisory Organization", to use the current preferred term. (Most insurance people still refer to it as a "Rating Bureau").

Generally, insurance companies don't develop their own classification systems for Workers Comp, but instead find it more convenient to use a system developed by such a rating bureau--NCCI, or one of the independent non-NCCI rating bureaus.

Again, these Rating Bureaus are not independent insurance regulators, but instead are semi-independent insurance industry organizations that have been recognized or authorized by state insurance statutes or regulators.

NCCI is largely funded by insurance companies, and insurance company executives make up a majority of its board members. But NCCI is independent of those insurance companies, or at least as independent as any organization can be that has such close financial and management ties with the insurance industry. Rest assured, insurance companies wield tremendous influence with NCCI, and with other Rating Bureaus.

NCCI has devised a classification system used by insurance companies to of approximately 550 "National" classification codes, intended to cover workplace exposures. NCCI devises the manuals and rules regarding classification that are used in most states, and also is responsible for determining the correct classifications for particular employers (in those states that use the NCCI system).

These "National" classifications are supplemented by what NCCI terms "State Specials", classifications or classification definitions that apply in only one state.

NCCI details what kinds of work are intended to be included in each classification code in the "Scopes manual". The Scopes manual is published and updated regularly by NCCI. The Workers Comp policy itself gives no detail about classification definitions or rules.

The Scopes manual is copyrighted by NCCI, so the only way to obtain a copy of this manual is to buy one from NCCI.

The states that don't use NCCI generally make their manuals available at no charge, but many of these manuals do not contain as much detailed information as the NCCI Scopes manual, which can leave some classification details murky.

Remember, there are a handful of states that do not use the NCCI classification system: California, New Jersey, New York, Delaware, Massachusetts, Michigan, Minnesota, North Carolina, Pennsylvania and Wisconsin are states that have their own classification systems.

Texas until 2014 had their Department of Insurance operate independently of NCCI, but Texas now has fully adopted NCCI classifications and manual rules, subject to some "State Specials".

 To see which states are NCCI jurisdictions and which have independent rating bureaus, consult our state-by-state directory.

In general, the NCCI classification system seeks to classify the overall business enterprise of an employer, not the particular work performed by specific employees. For that reason, a janitor working at a manufacturing plant will be assigned to the overallmanufacturing classification used by that plant, not to a janitorial classification.

The NCCI classification system makes an exception to this approach for construction-type classifications. For these employers,multiple classifications may be assigned to employees, depending on the actual work done. But work records must show specific hours at the various tasks for a worker's time to be split among the appropriate classifications.

Even for non-construction employers, more than a single classification code is usually used on a policy, because the NCCI has established that certain workplace exposures are almost always eligible to be broken out into their own classification--clerical, outside sales, and sometimes (but not always) drivers.

Determining what the proper classification code is for a particular employer is not always easy, even for NCCI. AIM has helped a number of clients who were misclassified into more expensive classes not just by their insurance company, but by NCCI itself.

This is not so much a criticism of NCCI itself as it is a reflection of the complexity of the classification system. 

Sometimes small details can make a big difference in which classification code is assigned to an employer, which in turn can make a big difference in rates and premium.

In The Real World...

Who determines the classification codes used on an employer's Workers Compensation insurance policy? It can be a bit of a complicated process involving multiple parts of the insurance system.

Consider all the various parties who may be involved:

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  • The Insurance Agent/Broker - Workers compensation class codes are often suggested by or applied on the insurance application initially by the insurance producer who is selling workers compensation insurance to the employer.
  • The agent will typically ask some questions of the employer to try and determine exactly what operations the employer's business performs.
  • Typically the agent will look at past policies of the employer for guidance. Then the agent/broker may discuss things with an insurance company underwriter to try and determine the correct class code for an employer.
  • But agents/brokers typically have widely varying levels of experience and expertise in the fine points of the classification system. The classification system can be complicated and tricky and the best advice of an insurance agent may sometimes be misleading or misinformed. Most importantly, the agent's views on classification do not bind the insurance company.

  • ---

• The Insurance Company Underwriter - After the insurance producer submits the workers compensation application to the insurance company it will be reviewed by an underwriter who may or may not agree with the agent regarding the classifications--unless the Workers Comp coverage is being placed in an Assigned Risk plan. Initial underwriting in assigned risk plans is often less than careful, which can set up the employer for unpleasant surprises down the road.

• ---

• 
  

• The Insurance Company's Auditor - After the policy has ended and an audit is done by the insurance company's auditor, the auditor (or the auditor's manager) may make changes in classifications--but these changes are made after the policy has expired, which can produce a very expensive and alarming "shock audit" where ultimate costs of the coverage are far higher than the policy itself would indicate.

• ---

• NCCI and other Rating Bureaus - NCCI and other Rating Bureaus have the responsibility to apply their own classification systems, sometimes overriding underwriters and auditors at the insurance company.
• Sometimes these organizations are requested to perform inspections to come up with an official classification verdict for a particular employer when questions have been raised. Remember that the various states also maintain appeal systems that can overturn a classification decision by a rating bureau like NCCI.

The insurance industry doesn't make it easy for an employer to figure out classifications rules, either. The insurance manuals can be difficult to understand, or in some jurisdictions relatively lacking in detail, even when an employer can get access to them. Insurance jargon like NOC (Not Otherwise Classified) or NPD (Non Premium Divisible) can also make it difficult for an employer to understand these insurance manuals. Consult our glossary for definitions of these and other terms.

There can be other complications that enter into the equation as well. Each legal entity in a state is supposed to be separately classified. And if there isn't a specific classification that neatly fits an employer, then "classification by analogy" is done, assigning the existing classification that seems to best fit the employer's operations. Such situations often lead to disputes between insurer and employer.

Because Workers Compensation insurance is, to a very great extent, a state-by-state matter, not only can the classification rules vary from one state to another, so too can the mechanisms for disputing or appealing a classification decision by an insurer or rating bureau.

AIM has experience helping clients in all states that allow insurance for Workers Compensation (and even in Ohio, which maintains a monopoly state fund for Workers Compensation, but where the NCCI classification system is now used.) So we are experienced in working with and appealing classification decisions by NCCI and also by other independent state systems, such as California, Delaware, Pennsylvania, Michigan, New Jersey and New York. 

Often, we find employers misclassified into a more expensive classification for years, in spite of competitive bidding by various agents and insurers. 

And we've helped employers successfully appeal and reverse classification decisions by NCCI and other rating bureaus.

We here at AIM are often asked by employers if they can find details of this NCCI classification system online. 

The answer, surprisingly, is no. Not without paying NCCI for the privilege.

One would think that such information would be publicly available somewhere on the internet, as it is so fundamental to the pricing of Workers Comp insurance. But NCCI views that manual, known as the Scopes manual, as proprietary and copyrighted material, which they sell. So NCCI doesn't want that material available freely.

To get that information, one must purchase a copy of the manual from NCCI, either a hard copy or an electronic subscription.

An employer may be able to get information about specific classification entries in the Scopes manual from their agent, but not all agents have up-to-date copies of this manual.

Advanced Insurance Management LLC doesn't sell insurance.

Instead, we consult with employers about proper Workers Compensation insurance classifications, experience modifiers, payroll audits, and other technical aspects that determine Workers Compensation insurance premiums.

AIM helps employers successfully dispute classifications used by insurance companies. We also provide expert witness services in legal disputes with insurance companies over proper classifications, rates, experience modifiers, and audit premium charges.

Find out if your employees have been misclassified by emailing Advanced Insurance Management at aim@cutcomp.com.

Consultants on Workers Comp Classification Codes, Experience Modifiers, Payroll Audits, & More

We've been helping employers since 1987, making Advanced Insurance Management one of the oldest and most experienced firms in the field of premium recovery.

Advanced Insurance Management LLC 3230 South Harlem Avenue,  Suite 203 Riverside, IL 60546 contact us:phone: 800-288-9256 e-mail:aim@cutcomp.com

 

 

The Field Guide for Employers 

 

"unlike any other workers' compensation guide...it is a must-have for those who manage workers' compensation insurance."

--Professional Safety magazine, review by Dr. Laura Rhodes