When an insurance agent gives you a quote, your estimated premium is determined by the amounts that you project to pay over the next 12 months to your employees (W-2) and uninsured subs (1099). Furthermore, these amounts should be separated by the exact type of work that is being performed. The rates are based on each $100 of payroll (includes amounts paid to uninsured subs) that is projected to be paid for each type of work.
For example, the rate for framing might be $14.50 per $100 of payroll (or 14.5% of payroll). There are different rates for framing, interior trim, roofing, wallboard, masonry, concrete, tile, painting, electrical, HVAC, plumbing, etc.
A complicated number called an Experience Modification also adjusts your rates. All businesses that purchase Workers’ Compensation are automatically issued an Experience Modification after they have completed one year where their premium has exceeded $9,000 or two consecutive years where their premiums have exceeded $4,500.
The Experience Modification results in either a discount or a penalty surcharge that is applied to your rates. You get a discount when your loss history (claims paid out) is better than average for the types of work you do in your state. On the other hand, you get a penalty surcharge when your losses are above average.
The insurance companies that write Workers’ Compensation insurance for Contractors file various rates for the above mentioned classifications of workers that must be approved by the state insurance department. Unlike several years ago, each of these rates vary slightly by insurance company. Furthermore, the insurance company can apply a discretionary discount or penalty of up to 25% depending on the loss history of the contractor.