Classification codes play a significant role for contractors, including when it comes to Workers’ Compensation insurance. Insurance companies use industry and employee classifications to assess risk levels and calculate premiums. Most insurance companies use codes established by the National Council on Compensation Insurance (NCCI)—an independent organization that gathers and analyzes data on workers’ compensation insurance. However, some states have their own Workers’ Compensation codes.
When purchasing a Workers’ Compensation policy, you will pay an estimated premium at the beginning of the year that is based on a number of factors. These include your payroll; industry classification (different industries have varying levels of risk with regard to workplace injuries and illnesses); employee classification codes; experience modification, which is based on actual losses/expected losses; and other factors.
Each industry classification code describes the nature of the business. This classification is determined by the type of construction business (roofing, carpentry, landscaping, etc.) you operate and helps insurance companies understand the types of hazards the business and its employees may face to accurately set premiums.
It’s also critical that employees are classified properly to reflect their job exposure. Every employee classification code describes a particular job and the potential hazards connected to it and is an important factor in determining the premium. Riskier jobs carry higher premiums. For example, a clerical employee who manages invoices and payments is at less risk of injury than a roofer who works at heights and is exposed to falls.
Verifying Classifications Are Correct
At the end of the Workers’ Compensation policy period, insurers will conduct a premium audit to verify the accuracy of the payroll reported, the industry classification code, and employee job classifications. Having proper classifications ensures that the audit accurately reflects your operation and each employee’s job.
Understanding class codes can be challenging. Each state has different rules regarding improper, incomplete, or inaccurate classifications, so be sure to work with an agent to ensure that you appropriately report the type of work that your company and each of your workers do.