The True Cost of Workers Comp Claims

Over the past decade, the direct cost of workers comp claims has increased significantly, in large part due to the rising cost of prescription drugs. According to the National Council on Compensation Insurance, the average direct cost of lost-time claims in 2015-2016 was $39, 424, up from an average of $26,400 in 2009. The highest cost claims — motor vehicle accidents — averaged  $73,559.  

But as staggering as these numbers are, they don’t come close to reflecting the true cost of worker’s compensation claims. According to a study by the Stanford University Department of Civil Engineering, the indirect costs associated with a workplace accident may be three to 10 times the medical and indemnity costs. This means the true cost of an average workers comp claim is closer to $120,000 to $400,000. 

The Indirect Cost of Workers Comp Claims

The indirect costs of workers comp claims fall into two broad categories: administrative and operational. Administrative costs include time spent:

  • Investigating the accident 
  • Preparing and submitting reports and documents
  • Interacting with insurers 

Operational costs are usually far higher and include any costs the employer must absorb to maintain operations until the injured employee returns to work. These include, but certainly aren’t limited to:

  • Work stoppage associated with the accident/injury
  • Any lost wages not covered by workers comp 
  • Overtime costs 
  • The cost of hiring and training a replacement for the injured employee 
  • Lost productivity, including lower productivity associated with new hires and the injured employee if they require accommodation when they return to work. Supervisors and managers will also be less productive while training and overseeing a new employee. 

If the accident caused damage to the physical premises or equipment, the cost of repair or replacement must be factored in as well. Depending on the nature of the accident or injury, there may also be other costs, including OSHA fines, legal fees, awards for pain and suffering and more. 

Insurance Costs

In addition to the indirect administrative and operational cost of workers comp claims, the employer faces an additional burden when an employee is injured on the job — an increase in its workers’ compensation premiums. As most employers know, these premiums are based on a number of factors, including industry-wide claims history and the employers experience rating (also known as the “mod factor.”) Based in part on a comparison of each employer’s claims experience with those of employers in the same industry, this factor can either increase or decrease an employer’s workers compensation costs. 

Take, for example, a hypothetical construction contractor whose base annual worker’s comp premium is $150,000. With a “claims free modification” (which reflects zero claims in the previous year and other variables, such as the business size) the contractor’s mod factor is 60 percent. This means his actual premium for the year is $90,000. 

But then the contractor’s forklift operator is injured in an accident and files a workers compensation claim. The claim costs the insurer $40,000. When the time comes for the employer’s policy to be renewed, his mod factor will increase (again, hypothetically) by 10 percent. This means his premium jumps $15,000 a year to $105,000. 

Add to this the fact that the higher premiums will likely stay in effect for three years, the actual insurance costs of a single “average” workers compensation claim will be $45.000. And the total indirect costs may be anywhere from $165,000 to $445,000. 

Decrease Claims to Contain Costs

Obviously, workers comp claims are incredibly costly, and the only effective way to contain those costs is to decrease claims. And while some accidents are bound to occur, it’s possible to maximize workplace safety by following OSHA guidelines and adhering to the following best practices, which apply to any industry:

  • Develop a workplace safety program and designate a safety officer to ensure that it’s carried out
  • Implement regular safety training for all employees
  • Ensure that managers and supervisors are aware of all safety procedures and educate employees as to how to follow them.
  • Instruct your staff on the appropriate medical provider to see if they are injured at work
  • Implement a post-incident protocol that gives your employees, managers and supervisors step-by-step instructions about what to do when an accident occurs
  • Monitor open claims to ensure that medical care is appropriate and reserves are fair
  • Develop a Return to Work program for injured employees.

About Us

The Carmoon Group Ltd. is a full-service insurance broker located in Hicksville, New York. Our seasoned professionals have over 20 years of experience servicing the needs of businesses across the United States. We offer comprehensive insurance programs, risk management plans and access to capital to qualified businesses. Just give us a call today to schedule your free consultation with one of our staff. Or if you prefer, reach out online and we’ll get back to you as soon as we can.

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