How to Check Your Experience Mod for Errors After an Acquisition

To check your experience mod for errors, get the experience rating worksheet and compare it, year by year, with the seller's payroll audits and loss runs. Look for payroll that does not match the audits, claims that belong to someone else and medical-only claims coded as lost-time claims. Also look for reserves that were out of date and recoveries that were never credited. Then confirm the ownership change was reported. This guide is for new owners who inherited a workers' compensation policy and want to know whether the mod they are paying is right.

What is an experience mod, and why should a buyer check it?

The experience mod is a factor that adjusts a workers' compensation premium up or down based on the business's own payroll and claims compared with similar employers. A mod of 1.00 is average. A mod of 0.85 lowers the premium it applies to by 15%, and a mod of 1.20 raises it by 20%. In the National Council on Compensation Insurance (NCCI) system, the mod is calculated by a rating organization, not by the insurer or your broker, and it usually applies for one year. See experience modification rate for the basics.

A buyer has three reasons to check it closely:

• It is a multiplier on a real cost. Every dollar of workers' comp premium is multiplied by the mod, so an error flows straight into earnings before interest, taxes, depreciation and amortization (EBITDA) and the cash you need for debt service.
• You inherited the history. The mod is built from the seller's payroll and claims, often from years with carriers you never dealt with.
• Others read it. Underwriters on other lines look at it, and some customers, especially in construction, ask for it when vetting vendors.

Who calculates the mod depends on the state: NCCI in many states, independent bureaus in others (such as California, New York and Pennsylvania), and state funds in North Dakota, Ohio, Washington and Wyoming. The worksheet looks different outside NCCI states, but the checks below still apply.

Some small businesses have no mod at all, because their premium is below their state's eligibility threshold, so a 1.00 factor applies. If yours has none, still check payroll and class codes, and revisit the mod as you grow: an add-on under common ownership can change whether the group qualifies and how the mods combine.

What is on the mod worksheet, and what should you check?

The worksheet shows the payroll and claims behind the mod and the math that turned them into a factor. You do not need to redo the math, only confirm the inputs. Under the NCCI plan, the worksheet generally uses about three years of policy data. It leaves out the policy in force when the mod is calculated, because carriers first report a policy's data about 18 months after it starts.

Two features of the formula explain why small errors matter. First, it weighs how often claims happen more than how large they are: NCCI's own example shows ten claims of $5,000 producing a much higher mod than one $50,000 claim. A stray claim from another employer can move the mod noticeably. Second, most NCCI states have approved an experience rating adjustment (ERA) that counts only 30% of a medical-only claim. A medical-only claim miscoded as a lost-time claim is charged at full value.

Which errors show up most often?

Errors usually start in the data the carriers reported, called unit statistical reports, rather than in the formula. Lay the worksheet beside the audits and loss runs and work down this list:

The last row matters for holding companies. Under NCCI rules, businesses with more than 50% common ownership are combined into a single mod, so an add-on acquisition can change the mod of companies you already own. See insurance for holding companies and roll-ups.

What if a claim was valued too high when the mod was calculated?

A reserve is the carrier's estimate of what an open claim will still cost. The worksheet uses each claim's value as of a set valuation date, not today's value. That has two consequences.

• If the value was already wrong on the valuation date, for example a claim that had closed but still carried its old reserve, ask the carrier to file a correction report. NCCI recalculates the current and up to two prior mods when it receives one.
• If the claim simply closed for less after the valuation date, the lower value usually flows into a later mod, not the current one.

Either way, review open claims with the adjuster well before each valuation, push to close claims that are effectively resolved, and get the closing value in writing. See closing old open claims and how to read loss runs.

Do not respond to a high mod by paying small injury claims out of pocket. Medical-only claims already count at a reduced weight, and holding back claims can breach the policy's notice conditions and may conflict with your state's employer injury reporting rules; ask the carrier or counsel what applies.

Does the ownership change affect your mod?

Usually, yes. Under NCCI rules, a business's past payroll and claims usually follow the operations to the new owner, in a stock purchase and in an asset purchase into a brand new company. Leaving the old experience behind is rare. It needs a near-complete change of owners plus a change in operations big enough to change the governing class code and the work process and hazards. The rating organization decides.

Three ownership checks belong in every mod review:

1. Was the change reported? In NCCI states and several bureau states, such as New York, Pennsylvania and Massachusetts, the policy requires you to report an ownership change to the insurer within 90 days. That applies whether or not the business has a mod. NCCI's ownership form, its online tool or a signed letter on letterhead can carry the details.
2. Is the mod applied to the right entity? After an asset deal, confirm the experience carried over to your new company and the policy shows that mod.
3. Did the timing come out right? Under current NCCI rules, a mod recalculated because of an ownership change applies back to the date of the change, up or down. The current and up to two prior mods can be revised. Reporting late does not avoid an increase; it can create a retroactive bill.

Independent bureau states have their own rules:

• New York's manual has tied the effective date of a recalculated mod to when the change was reported; confirm the current rule with the carrier or the New York rating board.
• California applies its own test of whether a change was material.
• Pennsylvania may transfer, exclude or combine experience depending on the deal.

If you bought only part of the seller's operations, whether the experience moves can depend on whether the seller's carrier can split out the data. For the wider workers' comp review, see reviewing the workers' comp policy you inherited.

How do you get an error corrected?

Corrections move through the carrier that wrote the policy year with the error, which may be the seller's former carrier. Work in this order:

1. Get the worksheet. Under the NCCI plan, the employer, the carrier and the producer of record can get it, as can others the employer authorizes in writing, so your broker can usually pull it.
2. Gather the evidence. Final audits and loss runs for every year in the experience period, from every carrier.
3. Mark each mismatch with the document that proves it: the audit page, the closed-claim letter, the denial, the recovery.
4. Send it to the carrier for that year and ask it to file correction reports. In an asset deal you may need the seller's help with its old carrier; check the cooperation terms in your purchase agreement with deal counsel.
5. Follow up with the rating organization to confirm the recalculation, then check that the policy was endorsed with the revised mod and premium.
6. If the carrier will not act, NCCI has a dispute process and independent bureaus have their own. The state's appeal process is the last step.

Timing matters. NCCI generally calculates a mod during the current policy term, often 60 to 90 days before the rating effective date, so a review a few months before renewal leaves room to fix inputs. Under NCCI's current plan manual, a carrier can correct reported payroll within three years of a policy's expiration. A decrease from a corrected payroll or loss report generally applies back to the start of the policy (or the rating effective date, if later), so a successful correction can produce a refund. Increases from corrections follow a separate timing rule. Independent bureaus set their own time limits, so start early.

With your written authorization, a Morrow review can pull the worksheet and line it up against your audits and loss runs. The carrier files any correction, and the rating organization decides the result.

A hypothetical example. A buyer's workers' comp premium is $100,000 before the mod, and the worksheet shows a 1.18 mod, so the buyer pays $118,000. The review finds a claim still carrying a $45,000 reserve that had closed for $6,000 before the valuation date, and a $12,000 medical-only claim coded as lost-time. The carrier files corrections and the recalculated mod comes back at, say, 1.04. At the same premium base that is $104,000, about $14,000 less in the year the corrected mod applies, money that stays in cash flow for debt service. The numbers are illustrative; the real effect depends on the formula.

Keep reading

• New Owner Review: Workers' Compensation
• Workers' Comp Class Code Corrections: Fixing a Common Overpayment
• How to Close Old Open Claims and Clean Up Your Loss Runs
• How to Read Loss Runs After You Buy a Business
• Return-to-Work Programs: How Light Duty Can Lower Workers' Comp Claim Costs
• All guides for new business owners

Frequently asked questions

I bought the assets through a new LLC. Do I start with a clean 1.00 mod?

Usually not. Under NCCI rules the seller's payroll and claims history generally transfers to the buyer when the buyer takes over the operations, even in an asset purchase into a new company. Excluding the old experience is rare and requires a near-complete change of owners plus real changes in operations, process and hazards. The rating organization decides.

Who fixes a mistake on my mod: my broker, the carrier or NCCI?

Your broker can pull the worksheet and build the case, but the carrier that reported the data files the correction, and the rating organization (NCCI or your state's bureau) recalculates the mod. The insurer then applies the revised mod to your policy.

How far back can a mod be corrected?

Under NCCI's current plan manual, a correction report triggers a recalculation of the current mod and up to two prior mods, and a carrier can correct reported payroll within three years of a policy's expiration. A few situations, such as subrogation recoveries, follow their own longer limits. Independent bureaus set their own rules, so ask the carrier and the rating organization what applies to your error.

My state does not use NCCI. Does any of this apply?

The checks are the same: payroll, class codes, claim values and ownership. The rules differ. California, New York, Pennsylvania and other independent bureau states have their own manuals and ownership rules, and North Dakota, Ohio, Washington and Wyoming run state funds with their own rating. Ask your broker which rating organization calculates your mod.

Should I pay small medical claims myself to protect the mod?

Usually not. Most NCCI states already count only 30% of a medical-only claim, and holding back claims can breach your policy's notice conditions and may conflict with state injury reporting rules. A better way to protect the mod is preventing injuries and getting injured workers back to work safely.

References

• NCCI: ABCs of Experience Rating
• NCCI: Experience Rating Plan Manual, Item E-1411 (Texas Department of Insurance filing)
• NCCI: Reporting Ownership Change Information
• WCIRB California: Changes in Ownership
• New York Compensation Insurance Rating Board: Experience Rating Plan Manual
• Pennsylvania Compensation Rating Bureau: Ownership (ERM-14) Form FAQ

This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.