Tag: National Council on Compensation Insurance

Florida Supreme Court Ruling May Increase Workers’ Compensation Premiums

A recent decision by the Florida Supreme Court may soon have employers paying substantially more for workers’ compensation insurance. In Castellanos v. Next Door Company, the Court ruled that Florida’s mandatory workers’ compensation attorney fee schedule is unconstitutional. In response to this ruling, the National Council on Compensation Insurance (NCCI) proposed increasing Florida’s workers’ compensation rates by 17.1%.

Under Florida Statute 440.34, attorneys who successfully secure workers’ compensation benefits for injured clients may be awarded attorneys’ fees. However, any attorney fee award, which is based on the amount of workers’ compensation benefits secured, must equal:

  • 20 percent of the first $ 5,000;
  • 15 percent of the next $ 5,000;
  • 10 percent of any remaining benefits that will be provided during the first 10 years after the claim is filed; and
  • 5 percent of any benefits secured after 10 years.

In Castellanos, the Florida Supreme Court considered whether this mandatory fee schedule is constitutional.

Marvin Castellanos suffered an injury on the job. The workers’ compensation insurance company refused to authorize the medical treatment recommended by its own designated doctor and raised twelve affirmative defenses to avoid paying compensation. After a final hearing, the Judge of Compensation Claims (JCC) ruled entirely in Mr. Castellanos’ favor.

Mr. Castellanos’ attorney spent 107 hours working on the case and requested an award of attorneys’ fees calculated at $350 per hour. Despite finding this request to be reasonable and warranted, the JCC was required to follow Florida’s mandatory fee schedule. Based on the actual value of the benefits secured, Mr. Castellanos’ attorney was awarded fees in the amount of $164.54, or $1.53 per hour.

The Court noted that the mandatory fee schedule does not consider the reasonableness of a fee and does not permit the review of grossly inadequate or grossly excessive fees. “Without the ability of the attorney to present, and the JCC to determine, the reasonableness of the fee award and to deviate where necessary, the risk is too great that the fee award will be entirely arbitrary, unjust, and grossly inadequate.” Accordingly, the Court ruled that Section 440.34 is unconstitutional.

As a result, the statute’s immediate predecessor, which was construed to provide for a “reasonable” award of attorney’s fees, was essentially revived. Though the statutory fee schedule remains the starting point for calculating fees, claimants must now be allowed to present evidence to show that its application will result in an unreasonable fee.

Though the Court emphasized that its ruling does not mean that claimants’ attorneys will receive a windfall, insurance companies disagreed. On May 27, 2016, NCCI, which is a licensed rating organization authorized to submit workers’ compensation insurance rate filings on behalf of Florida insurance companies, submitted a proposed rate increase to the Office of Insurance Regulation (OIR).

According to NCCI, the first year impact of Castellanos will be a 15% increase in overall Florida workers compensation system costs. (The total proposed rate increase of 17.1% includes factors that are not related to Castellanos.) NCCI proposes applying the increased rates to new and renewal policies that are effective on or after August 1, 2016. NCCI also proposes applying the increased rates to all policies in effect on August 1, 2016 on a pro-rata basis through the remainder of the term of these policies.

If NCCI’s proposal is approved, Florida would have the highest workers’ compensation rates in the Southeast. The OIR plans to hold a public hearing regarding NCCI’s proposed rate increase in the coming months, so stay tuned.

Even if the OIR approves all or part of NCCI’s proposed rate increase, there are ways to lower workers’ compensation insurance costs, such as promoting employee safety and maintaining a safe work environment.

Please contact us if you would like more information about controlling workers’ compensation insurance costs.

Additional information is also available in our weekly Risk Management Newsletters.

Calculating Workers Compensation Insurance Premiums

Workers’ Compensation (WC) provides medical, disability, rehabilitation or death benefits to employees who have suffered a job-related injury or illness. Employers are generally required by their state’s law to provide WC coverage to employees. Since most employers purchase insurance to satisfy this statutory obligation, it is important to understand how WC insurance premiums are calculated.

The formula for calculating the starting WC premium is (Payroll / 100) x (Premium Rate). To understand this formula we need to discuss three elements that play a big part in calculating the premium.

Payroll

The premium for WC insurance is based on an employer’s payroll, which is generally defined to include the total remuneration paid by an employer. Payroll typically includes wages, salaries, commissions, bonuses and paid time off, and typically excludes tips, severance, active military duty pay and employee discounts. Employers should check state-specific requirements, including the treatment of executive officers, when calculating payroll for WC insurance purposes.

Classification (Class) Code

Insurance companies use class codes to assign premium rates to specific workplaces based on the risks associated with a particular kind of work. Most states use the classification codes developed by the National Council on Compensation Insurance (NCCI). There are approximately 550 different class codes and they can be very specific. For example, the correct code for Janitorial Services by Contractors may depend on whether the services include window cleaning above ground level.

Though a single employer can be assigned more than one class code, it is important to note that classification codes are designed to categorize employers with common exposures rather than the specific occupations of each employee within an organization. Since class codes are specific and appear to be somewhat conflicting, choosing the appropriate class code is not always easy and mistakes are common.

Premium Rate

Each class code is assigned a premium rate that corresponds to the risks associated with that particular kind of work. These rates, which are evaluated regularly, are applied to every $100 of payroll. Higher risk jobs are given higher premium rates. NCCI provides premium rates for each of its class codes, and many states rely on them when setting their own rates.

Now, let’s assume an employer has a payroll of $187,500 and that the premium rate for its classification code is $1.07. Divide the payroll by 100 [187,500 / 100 = 1,875], and multiply the quotient by the premium rate [1,875 x 1.07] to get a premium of $2,006.25. Note that if the applicable premium rate is $6.05, then the premium would be $11,343.75.

Remember that this is only the starting premium. Additional pricing factors may be applied to the starting premium to arrive at the final premium, such as:

  • Minimum premium requirements
  • Experience modification based on prior loss history
  • Discounts based on the size of the premium
  • Credits for qualifying safety and drug-free programs
  • Dividend plans tied to loss experience
  • Audits adjusting premiums to reflect actual (rather than estimated) payroll

Since the starting premium can be significantly affected by these additional pricing factors, a reputable insurance agent with substantial experience in evaluating and placing WC insurance should be consulted. For those employers with a statutory obligation to provide WC coverage, mistakes can be very costly.

If you would like more information about obtaining workers’ compensation insurance for your organization, please contact us.

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