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NCCI Codes Are Frequently Applied Incorrectly
One of the most important things to keep in mind about NCCI Codes (National Council on Compensation Insurance) for workers comp class codes is that they are frequently applied incorrectly.
Inside the industry we know it's an imperfect system. And, many outside of the insurance industry already know it's an imperfect system due to the fact that they:
Received a work comp audit that resulted in reclassification by their insurance carrier after many years in business
Successfully challenged their workers comp class codes at NCCI
Successfully challenged their workers comp class codes before state boards
Intuitively know they are misclassified but don't know where to turn
But, if you need convincing, the best proof of the system's imperfection comes directly from NCCI; the Rating Bureau that, literally, wrote the book on work comp class codes.
NCCI Codes: NCCI Classification Inspection Program
NCCI has a continuous inspection program in all of it's states to monitor for NCCI codes that are frequently misapplied and to guarantee, to the best of NCCI's ability, the integrity of the Workers Compensation Rating system.
According to NCCI:
"These [NCCI inspections] help determine whether the governing classification code or other classification code(s) identified on a workers compensation insurance policy reflect the current business operations. "
Performing inspections of business (like yours) operations to ensure proper application of the work comp class codes is the primary focus; the integrity of the whole system of codes for workers compensation.
And, you can correctly infer from the very existence of this program that workers' compensation insurance carriers (with the help of brokers) frequently misclassify their customers.
NCCI's Findings Are Mind Boggling
NCCI annually publishes their list of the 10 most reclassified NCCI codes. Correspondingly, they also report to which workers comp codes those misclassified codes were reassigned. And, for the last 4 years NCCI's "top" results has been the same.
Workers Comp Code 8810 and Class Code 8742 are the two of the three most misclassified workers comp codes for the past 4 years. But, this is not the "mind boggling" result. NCCI workers comp codes 8742 and 8810 are among the lowest rated (least expensive) codes. If someone were inclined to game the system, you'd expect him to look to these NCCI codes to classify as much payroll as possible. There are plenty of other reasons why this may occur as well.
Insurance Companies Struggle With NCCI Codes To Classify Themselves Properly
What is mind boggling is the industry which most frequently misapplies these two NCCI workers comp class codes; the INSURANCE INDUSTRY! See the "New Governing Code" column in the above tabels? Class code 8723 Insurance Companies.
So, the 2 most frequently misapplied workers comp codes, 8810 and 8742, happen to be most frequently misapplied to insurance companies.
Why is this mind boggling? Realize that your insurance company's expertise is.....insurance. Right? Workers compensation insurance carriers are experts responsible for the application of NCCI's Classification System and assignment of NCCI workers comp codes to all businesses including yours. But, they have trouble simply applying the correct codes to their own workers compensation insurance programs? Keep in mind, also, that an insurance company is a pretty straightforward, simple risk to classify; not nearly as involved as, say, certain construction risks.
What's Required "To Get NCCI Codes Right?"
To properly classify a business one must:
Have an expert knowledge of NCCI work comp class codes
Stay current with code revisions, updates, deletions, "state specials," etc to the manual
Understand the customer's business operations
If there is any excuse, the insurance industry would say "well, 8723 Insurance Companies is a new code and class codes 8810 & 8742 were formerly applied to our industry." But, NCCI created Classification Code 8723 in 2009; 13 years prior to the writing of this article. When NCCI does create, edit or delete classification codes it issues something called "Item Filings." These are memo's to the industry that all insurance companies receive.
If the industry has trouble classifying itself, you might want to think twice about simply accepting that you're properly classified without doing your own due diligence or enlisting your own expert for a second opinion.
Another thing to keep in mind with respect to how is work comp calculated: if classification codes are wrong, then your Experience Modification Rate is wrong too. The entire workers compensation rating algorithm becomes skewed due to incorrect rates and expected losses.
What Does NCCI Recommend Of Insurance Companies, Brokers, and Insureds Regarding NCCI Codes?
Be Cautious With "NOC" NCCI Codes For Workers Compensation
NOC stands for "Not Otherwise Classified." One example of many is NCCI Code 3632—Machine Shop NOC. NOC Codes for workers compensation are "catch all" buckets for activities that don't neatly fit into more specific NCCI WC Class Codes.
If, however, you receive a policy or premium audit with Not Otherwise Classified class code on it, there could possibly be a more specific Class Code. In fact, here is what NCCI has to say about NOC work comp codes:
"It is imperative to verify that another classification does not specifically describe an employer’s business before assigning an NOC code."
What Does NCCI Recommend Of Insurance Companies And Brokers Regarding Workers Comp Codes?
"NCCI recommends that carriers and agents (emphasis mine) be aware of these ongoing reclassifications and requests that industry partners inform all pertinent staff members accordingly. It is important that all existing and new policies recognize the changes expressed in these item filings and follow up by making necessary corrections to individual policies."
Clearly there are problems within the system. And, for every time an insurance company misclassifies one of their customers an error slipped past both the client and it's broker.
"What Everyone Ought To Know About NCCI Codes" is our attempt to strongly suggest businesses take as much care to monitor the pricing of this aspect of workers compensation insurance as it does any of the other important costs of doing business. Don't assume your insurance carrier is right (especially if they try to make changes at work comp audit time), and don't rely on a broker to monitor this for you.
Stuart Cytron, MBA has been published in trade journals such Construction Forum St. Louis and St. Louis Business Journal among others. You can read more about Stuart and how he developed a passion for helping businesses reduce work comp expenses on his website.