If you own a business that has operations in North Carolina, then you should buy workers compensation insurance to protect your company from financial losses caused by workplace accidents. Buying a work comp insurance policy should not be the end of your analysis of the risks associated with workplace injuries. As a business owner, you should understand the hidden costs that are associated with workplace accidents as these hidden costs can be enormous. If you take the time to understand the hidden costs, you will better understand the importance of implementing safety procedures to try and reduce both the frequency and the severity of on the job accidents.
So what is the difference between direct costs and indirect costs related to workplace injuries? Let’s take a moment to explore each of these costs and how they can impact your bottom line.
We can start with direct costs since they are the easiest to measure and understand. Direct costs can include the medical costs for the injured employee, from hospital and physician expenses to pharmacy and physical therapy outlays. We must also include the compensation payments to the injured worker for loss of income as well as dependent payments and death benefits. When a claim turns ugly, you can add in legal fees and settlement costs as well. The workers compensation insurance company will bear most all of the direct costs we have mentioned so far.
The other category of direct costs is the costs that are borne by the employer. The most obvious of these is the workers compensation insurance premium. Your company has some limited control over this direct cost when you find lower insurance rates and are able to keep your payroll numbers low. The other direct cost that an employer could face here are the increase in workers compensation premiums due to past losses. This is the additional premium that is associated with an increase in your experience modification factor.
What about the indirect costs associated with workplace accidents and injuries? These cost will certainly vary from one kind of business operation to another. Your business could face higher costs in terms of lost productivity and service standards, the additional costs of hiring temporary labor to replace the injured worker or the costs of paying non-injured workers overtime pay to bridge the gap while your injured worker is recovering. Your company might also face the additional costs of hiring and training replacement workers for the injured ones. And there are accident investigation and administrative follow up costs associated with any work place injury claim. Last of all, a workplace accident could force your company to face lost sales.
Indirect costs of a workplace accident are generally thought to calculate at 4 times the amount of direct costs in a workplace accident. We can run a quick calculation that might help shed light on the magnitude of the indirect costs problem. Let’s say you have a workplace accident that generates a workers compensation claim of $20,000. While this seems like a large number, this is not unusual. This means that your indirect costs would run at about $80,000. Now if your company has a profit margin of 5% (which is pretty close to an average), then you will need to generate additional sales in your business of $1.6 million to cover the indirect costs of this claim. These numbers just cannot be ignored.
Your takeaway as a business owner is that reducing the frequency and severity of workers compensation claims is a critical link in your profit equation. So what should you do? I would suggest that you choose an insurance company that specializes in workers compensation insurance only when you buy your next workers compensation policy. These specialty companies have real world expertise in claims management as well as loss control programs. Often they offer these loss control programs at no charge to their policyholders. At Clinard Insurance we write workers compensation insurance for hundreds and hundreds of small businesses all across North Carolina and South Carolina. If you would like help with your workers compensation insurance as well as help getting your workplace accident indirect costs under control, please call us, toll free, at 877-687-7557 and we will put our experience and know how in this area to work for you, saving you money and helping you reduce your workplace accidents.