Class Codes: Key to Accurate Underwriting

By Hank Beck, TAGA Workers Compensation Underwriter

A problem with workers compensation submissions that seems to stump many people is choosing correct class codes. Choosing the correct codes can be a difficult task due to the complexity of the system used. In Texas, class codes are governed by TDI. Texas licenses much of the NCCI system, but makes significant variations in specific classification rules. The system has over 700 possible workers compensation codes to choose from to correctly classify your risk. So why is it important to spend the time to correctly identify the proper code? For many reasons, including accurate premiums and good customer service.

Why a Class Code System?
The classification system exists to group employers so that each classification reflects exposures common to that type of employer. It is designed to simplify the process for employers seeking to obtain workers compensation insurance. By using standard class codes, employers can effectively shop rates and coverage.

Correctly Identifying Class Codes
An incorrect class code can cost your insured thousands of extra dollars each year.
Correctly identifying class codes at the inception of the policy can eliminate problems and additional premiums at the policy’s final audit.

The first thing to consider is what is the governing class code? Or in other words, what activity is the primary business occupation and includes the most payroll? The easiest way to get this information is by understanding fully what it is that your insured does. Ask qualifying questions of the employers to make sure that you or anyone else who looks at the submission and policy will understand fully what it is they do.
Documenting this and providing this to your underwriter at your MGA or carrier, will ensure that the insured is classified correctly.

Next, you can locate a listing of Texas class codes on the Workers’ Compensation Classifications page of the TDI website. Using this information, you can determine what the correct class code is and make the suggestion to your underwriter, along with the document you recorded from the insured.

Standard Exemptions
Another thing to look at are standard exemptions, these include Clerical Office Employees, Drafting Employees, Drivers, Chauffeurs (and Their Helpers), Salespersons, Collectors or Messengers, and Executive Officers. Making sure that employees who engage exclusively in these activities are correctly classified will save your insureds money.

General Inclusions and Exclusions
Some operations within a business may appear to be separate, but are actually included in the scope of the governing class code. Examples of these are restaurants solely for the use of employees, manufacturing of containers for use by the employer, and printing by the insured for their own products.

Exclusions, because they may be higher risk, do not fall under the governing class code. Examples of this could include aircraft operation and new construction by the insured’s employees. It is best to check TDI’s “Texas Workers’ Compenstion and Employers’ Liability Manual” for a complete list and details on inclusions and exclusions.


Resolving a Dispute
Once an insured has been classified with a class code, they will earn and loose points on their experience modifications, based on losses and participation in programs such as stop-loss. Should it be discovered after years of use of the same class code that it is an incorrect one, TDI must become involved to change the code.

If a carrier or insured disputes, they can file for a ruling with TDI, wherein many cases TDI will investigate the company with an audit that may include a visit to the insured’s place of business to determine exactly what it is they do. TDI can also be contacted informally for a suggestion for a class code when it is ambiguous what it is they do.

Fortunately, a process exists for applying the experience mod to the corrected class code if it was discovered to be incorrect. However, the extra time and energy involved in getting it corrected serves as a good point for getting it correct the first time.


Do it Right
Class codes can be difficult to get right each and every time. But with correct documentation it’s very attainable; especially when you consider that the insured has you, your MGA, carrier and TDI looking out for them.

Interpretation and assumptions are usually the biggest mistakes when it comes to identifying correct class codes. By taking the guesswork out of all the steps, your insured will end up with the policy they need and reduce the chance of being hit at audit.

Remember that TDI is the ruling body on class codes, and as such the primary resource for class code information. TDI’s workers compensation website is http://www.tdi.state.tx.us/wc and contains a wealth of information.

By taking the extra time to make sure they are correctly classified, you will have a client who always turns to you at renewal time and for all their insurance needs.


Hank Beck is a Senior Workers Compensation Underwriter with Tejas American General Insurance Agency (TAGA.) He has over 26 years experience as a Workers Compensation Underwriter with TAGA, Texas Mutual, AETNA, Paula Insurance and Kemper Insurance. He can be contacted at Hank@taga1.com.

This article appeared in the July 30, 2009 edition of The Insurance Record