Written by Joe Elmore, Smith-Peabody-Stiles and Dennis Partridge, Garan, Lucow and Miller Law Firm
What it is and how it came to be
Lurking in what was once a small section of almost every corporation’s financial pie chart lived an insurance coverage that for decades went relatively unnoticed. But then, almost overnight, its section of the pie grew larger and it started to receive more serious attention.
The subject here is worker’s compensation insurance. Unlike some insurance, work comp coverage in Michigan is mandatory for a business of any size. The enabling legislation for work comp insurance lies in Michigan’s Worker’s Disability Compensation Act of 1969. It is part of the system of checks and balances that is built into the framework of our government. The act applies, essentially, to all private employers, other than agricultural, who regularly employ three or more workers; and all public employers, regardless of the number of people employed. However, the heart and soul of the act isn’t so much about compensation, as it is about safety.
Present day work comp coverage was spawned in the shadows of the industrial revolution when worker injuries and deaths started to mount, but there was no way of holding one party or the other responsible for the costs of the consequences. Some camps believed employees should watch out for themselves, and others believed that employers should be responsible for their workers’ welfare.
A cost-sharing arrangement between employees and employers to support injured and disabled workers was first established in Germany. England followed close behind in the 1890s with what was then known as the British Compensation Act. The problem wasn’t addressed in the United States until 1910, when a group of delegates from various states met in Chicago and created the Uniform Workmen’s Compensation Law. This framework was subsequently instituted in one form or another by many states in their individual statutes. Only a handful of states failed to adopt this type of law over the next decade, and the new state of Hawaii was the last one to come aboard with their version in the 1960s.
“Michigan enacted Workers’ Compensation Legislation in 1912,” said Dennis Partridge, of the law firm of Garon, Lucow and Miller and legal counsel to the Apartment Fund. “Although the statute has been amended on a number of occasions since initial enactment, the intent of the statue is to provide for lost wages, payment of medical and expenses and the right to vocational rehabilitation for workers injured in the scope and course of their employment.”
How it works
Workers’ comp is a no-fault system designed to protect employees who are made ill, injured or killed on their job—and also to protect employers from financial ruin due to negligence lawsuits.
“The act is intended to cover and protect employees who not only sustain traumatic injuries such as a fracture, but also those who contract an occupational disease due to exposure in the workplace,” Partridge said.
Benefits such as medical costs, wages and death settlements are paid without regard to determining who was the negligent party. Employees still reserve the right to sue any third party that might have been negligent in the incident. Workers’ compensation laws are still administered at the state level.
Michigan has a very competitive workers’ compensation insurance system. Michigan’s “open competition” system allows competitive market forces to set the WC insurance rates. Thus, Michigan companies can shop among more than 220 insurance carriers for the best, lowest-cost prices. It is this structure that allowed for the formation of the Apartment Association’s Work Comp Fund.
Besides the potential for savings in the marketplace, work comp insurance is one of the few insurance entities where a spankin’ clean safety record can actually bring about bottom-line savings. To understand the correlation between safety and savings, it is important to understand how work comp premiums are calculated.
Underscoring this, Partridge said: “There is a direct nexus between maintaining a good safety record and achieving savings by way of reduced premium for work comp coverage.”
Premiums are determined by class of employee (clerical employees generally cost less than manufacturing employees, for example) as well as by regional benefit levels. Premiums are based on a “per one hundred dollars of wages” premise. The wild card in the premium equation is the dreaded experience mod. This is a factor used to take into account your claims history. If you run an unsafe shop and have a high number of claims, you’re going to pay a lot more than someone else in your industry that is more conscientious about safety. If your claims history makes you too high a risk, private insurance firms will refuse to cover you at all and you’ll be at the mercy of your state’s “assigned risk pool.” Avoid this if at all possible.
Partridge said a greater understanding of this component of work comp insurance is an “on-ramp” that leads to establishing an effective safety program.
“The primary factor in reduction of experience modification is attention to safety in the workplace and implementation of an aggressive safety program,” he said. “An effective safety program not only assists in the reduction of premium, but also results in reduced claims; not only by way of frequency, but also severity, thereby resulting in the reduction and/or amelioration of human suffering.
“An effective safety program also will result in sending a message to current employee, that they are considered to be an asset by management and that there is a genuine concern exhibited by management for the well being of its employees.
“Further, when there are reduced claims, there is less stress and pressure on remaining personnel to either absorb the functions of an individual out of work due to work related injury and/or time taken to train a replacement employee.”
Next month: Learn more about Worker’s Comp and how the system can work for you. Smith-Peabody-Stiles supports efforts to make the workplace a safer and more productive environment. For concerns or questions about safety issues contact Wendy Light or Jim Peabody at SPS, 1-800-467-6645. We welcome your calls and inquiries.