In a recent post, we talked about dual wage classifications for California workers compensation within the construction industry. Today, we’re continuing our chat about workers comp and what the construction industry needs to know. We’ll delve into waiver of subrogation endorsements and how they’re billed. But first, what do those words mean? Waiver. Subrogation. Endorsements. Did we just stumble into a law office?
Let’s break it down…
As a quick refresher, workers compensation insurance is insurance for an employee who has been injured as a result of their job duties. Medical costs, rehabilitation costs, and lost wages are covered under workers comp insurance, and in most states, workers comp is required by law.
An endorsement is an addendum or add-on to an existing insurance policy. A waiver of subrogation is a type of endorsement that can be added on to your workers comp insurance policy. It can be a blanket waiver for all companies or it can be for a specific company. Sometimes when you’re contracting your employees out to another construction company, they may require a waiver of subrogation for their company.
A waiver is a surrender of a right or a claim. In the context of this article, we’re talking about waiving rights to subrogation. Subrogation is basically getting reimbursed for losses. For example, say you buy your friend a coffee because they forgot their wallet at home. They swing by the house and grab the wallet and now you want to be paid back for the coffee. If you waive subrogation, you’re waiving your right to be paid back.
It’s the same when it comes to workers comp insurance. By getting workers comp insurance, it’s basically a waiver of subrogation that you won’t go and sue your company for losses due to an on-the-job injury. It works the same for insurance companies. If your insurance company pays for your medical expenses when you are injured on another company’s job site, your insurance company may want to subrogate and get back that money from that job site’s insurance company. But, if you’ve waived subrogation, your insurance company can’t get that money back.
What are the implications for you as the owner of a construction company?
Just be sure to keep track of the wages of all employees you send to the jobsites for which you have a waiver of subrogation because you will need to report this to your insurance company. Since laws came into effect in 2008, insurers are now required to perform audits to make it easier to identify which classification(s) employees fall into.
What’s the premium charge for my workers compensation when I have a waiver of subrogation?
Insurance companies are now required to audit all new policies, so you can either proactively report your waiver of subrogation payroll for the affected employees or keep records and wait for the audit. If you choose the former, for each class code that the waiver applies to, here’s the formula you use to figure out the additional premium charge:
Premium x waiver percentage = additional premium charge
In a previous article, we explained how to calculate your premium: (total wages / 100) x billing rate. For example…if your total wages for the employees affected by the waiver of subrogation is $1,000 and the billing rate is $5 for every $100 of payroll, and the waiver rate is 2%, you’d calculate the premium as: Premium = (1,000/100) x 5 = $50.
From there, you can calculate the additional premium charge: 50 x .02 = 1
In this scenario, the additional premium charge would be $1, so the total premium would be $51.
So, when another company asks for a waiver of subrogation, now you know what the term means and what the implications are; i.e. you’ll be paying a higher premium on your workers compensation insurance. If you know the approximate payroll of the employees you’re contracting out, you’ll even be able to estimate out your additional premium payment. If you have any questions about workers compensation insurance and waivers of subrogation, don’t hesitate to call or text us at (858)384-1506.