A Class Act: Understanding the Texas Workers’ Comp Classification System

Workers’ compensation is a very complicated insurance. I know. I’ve worked for Texas Mutual Insurance Company’s premium audit department for 10 years. Prior to that, I was the director of the classification department at the Texas Department of Insurance (TDI).

Understanding the classification system is vital for agents because it plays such an important role in determining the insured’s premium. The underlying principal of the classification system is to understand the importance of “getting it right.”

Classifying insureds correctly serves three purposes: It keeps the statistical data accurate for rate-making purposes; it helps maintain a “level playing field” among competing businesses; and it reduces problems for the insurance carrier, the insured and the agent at final audit.

System data
Like any large endeavor, the workers’ comp insurance system cannot function properly without reliable information. TDI uses its statistical system data to develop benchmark rates based on payrolls and losses reported in the individual classifications. These benchmark rates are provided to insurance providers, which enable each workers’ compensation insurance company to appropriately file their rates for the various classifications with TDI. Everyone benefits when the quality of data is accurate, and it helps keep workers’ compensation affordable. There are five basic classification industry groups: manufacturing operations, construction/mining/stevedoring, oil and gas operations, service industry and other.

Each group has specific rules regarding classification assignment. That’s why it is important to determine what the business of the insured is before assigning the classifications. The object of the classification procedure is to assign the one basic classification that best describes the business of the employer. Classify the business, not the separate occupations or duties of the individual employees’ within the business.

Each classification includes all the various types of labor found in a business (subject to certain exceptions). Other classifications may be assigned in addition to the primary classification in accordance with the rules or procedures outlined in TDI’s Workers’ Compensation Basic Manual. You may purchase the manual from TDI or download it from the department’s Web site at http://www.tdi.state.tx.us/company/wcindex.html.

Level playing field
Maintaining fair competition between similar businesses is not just important to each individual company; it is also important for our state economy.

For a simple example, imagine two concrete construction companies, Company A and Company B, in the same town. Each is engaged in identical types of construction. Assuming all else is equal, they should be awarded an equal number of jobs through bids.

However, if we misclassify Company A as a masonry contractor and Company B as a concrete contractor, each company will be assigned a different classification code—with a different rate—even though they perform the same type of construction. In this example, Company A gains an unfair advantage when bidding jobs because the masonry classification has a lower rate than the concrete classification. Left uncorrected, such a situation could drive Company B out of business, plus distort the ratemaking process.

Final audit
By understanding and applying the proper classifications and estimated payrolls at the inception of the policy, we eliminate problems and large additional premiums at the policy’s final audit.

Agents, of course, have another incentive to properly classify their clients: customer satisfaction. If an insured receives a large additional premium notice after we conduct the final audit because the agent misclassified them or underestimated their payrolls, the insured may look for a new agent or take other actions against the agent. This may also cause the insured to become a non-subscriber.
These are just a few factors involved in “getting it right” when completing applications and requesting quotes for workers’ compensation coverage for your clients.

Bob Fournier is a Classification Code Specialist with Texas Mutual Insurance Company.Texas Mutual hosts workshops on classification and ownership issues. Additional information is available on the company’s Web site at www.texasmutual.com.

Topics Texas Agencies Workers' Compensation Construction