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Worker's Compensation
Commercial Auto


The Evolution of Workers Compensation

The concept that workers should be protected from and compensated for injury or illness occurring in the workplace came about with the rise of the trade union movement at the beginning of the 20th Century. Workers Compensation insurance is a direct result of public awareness and outrage at the poor and often dangerous working conditions people were forced to labor under in order to make a living, and the financially devastating effects of worker injury or illness on the worker and the worker's dependents.

Workers Compensation insurance is the oldest social insurance program in the United States; in fact, it is older than both social security and unemployment compensation.

California adopted Workers Compensation laws in the 1910's along with most other states. Workers Compensation is based on a no-fault system, which means that an injured employee does not need to prove that the injury or illness was someone else's fault in order to receive Workers Compensation benefits for an on-the-job injury or illness.

Since almost every working Californian is protected by Workers Compensation benefits, it is important that employers and employees alike have an understanding of Workers Compensation insurance and how it works.


What Benefits Are Available in a Workers Compensation Policy?

Depending on the circumstances of the injury or illness, injured workers are entitled to specific benefits as structured by Workers Compensation insurance. There are six basic types of Workers Compensation benefits that include medical care, temporary disability benefits, permanent disability benefits, vocational rehabilitation services, supplemental job displacement benefits, and death benefits. Injured workers may be entitled to one or more of these benefits.

Medical Care

Injured workers are entitled to receive all medical treatment reasonably required to cure or relieve the effects of a work-related injury or illness. Medical care can include physician services, hospitalization, physical restoration, physical therapy, chiropractic treatment, dental care, prescriptions, x-ray, laboratory services, or any other care considered necessary or reasonable by the treating physician and may be subject to applicable treatment guidelines.

Generally, the employer is responsible for arranging medical treatment for the first 30 days from the date the injury or illness is reported. After 30 days the employee is then free to select any treating physician or facility. If an employee, prior to any injury or illness, notifies their employer that they have a personal physician, then that physician may treat the employee from the date of the injury or illness. The choice of treating physician differs, however, if the employer and the employee have opted for a Health Care Organization (HCO).

First Aid Treatment

First aid treatment is included as medical care that all employers must provide for their injured employees. In conjunction with the Department of Industrial Relations, Division of Workers Compensation, the California Department of Insurance (CDI) wants to remind all employers, physicians, insurance carriers and self-insurers of the need to comply with Section 6409(a) of the California Labor Code.

Section 6409(a) requires a physician who treats an injured employee to file a "Doctor's First Report of Injury" (DFR) with the claims administrator for every work illness or injury, even first aid cases where there is no lost time from work. Although the Labor Code contains "first aid" exceptions for the Employers Report (Form 5020) and the Employee Claim Form (DWC-1), there is no such exception for the DFR. The insurance carrier (or the employer if the employer is self-insured) must forward these DFR's to the Department of Industrial Relations. There is no "first aid" exception to this statute.

The CDI and Department of Industrial Relations believe there are improper arrangements in place between some medical providers and employers that allow the employer to dictate how injuries are to be classified by the physicians. In some cases, and at the request of the employers, the physicians send the DFR only to the employers and not to the insurance carriers. This arrangement occurs even though the injuries clearly are beyond first aid. This agreement is often marketed to employers as a way to keep premiums from rising or to lower them. Such marketing practices are both improper and may also contribute to possible criminal violations related to premium fraud and the fraudulent denial of Workers Compensation benefits to injured workers.


Temporary Disability

When a worker is unable to return to work within three days of his/her injury or illness, he/she is entitled to temporary disability benefits to help partially replace wages lost as a result of the injury or illness. A physician must verify that an injured employee cannot work because of an on-the-job injury or illness before temporary disability benefits are payable. The benefits are generally designed to replace two-thirds of lost wages, up to the current maximum prescribed by law. Benefits are payable every two weeks until the employee is able to return to work or until the employee's condition becomes permanent and stationary as reported by the treating physician. Current law limits benefits to a 2 year maximum and increases the maximum to 4 years for certain specified injuries.

Permanent Disability

If a work-related injury or illness results in permanent impairment to an employee, the employee may become eligible for permanent disability benefits. The amount (percentage) the employee receives depends on the extent of the physical injury or disfigurement and consideration being given to an employee's diminished future earning capacity. Other factors that are considered when calculating permanent disability include: the date of injury, the age of the employee when injured, and the employee's occupation. (Due to recent changes in Workers Compensation law, the Department of Workers Compensation [DWC] may institute additional regulations to help calculate permanent disability benefits.) Current Workers Compensation law sets the benefit amount and the maximum amount payable, and the benefits are paid every two weeks until the maximum amount is reached or a lump sum settlement is made.

The percentage of permanent disability is determined by using the Permanent Disability Rating Schedule and an assessment of the injured worker's permanent impairment and limitations. The Permanent Disability Rating Schedule can be accessed through the Department of Industrial Relations

The assessment of the injured worker's permanent impairment and limitations is made by either the treating physician, a Qualified Medical Evaluator (QME), or an Agreed Medical Examiner (AME) if the employee is represented by an attorney.  The Division of Workers Compensation's Medical Unit appoints and regulates QMEs. (Please see the "Resources" section of this brochure for DWC Medical Unit contact information.) If there is a disagreement with the treating physician's opinion, and the worker is not represented by an attorney, then the worker can choose a physician from a three-member panel provided from the DWC Medical Unit to perform a separate evaluation. When a worker is represented by an attorney, the parties must attempt to agree on a physician (AME) to perform the evaluation. If the parties are unable to agree on a physician, a three-member QME panel will be appointed by the DWC Medical Unit. The parties will then choose a physician from this three-member panel.  Each party is allowed to strike off one physician from the panel in order to narrow the selection down to one final physician.   In the case that the evaluations are different, the amount of permanent disability will be determined through negotiation or litigation, if necessary.

Vocational Rehabilitation(for injuries before 01/01/04)

Vocational Rehabilitation Services are offered to injured workers who are unable to return to their former type of work. The services include the development of a suitable plan, the cost of any training, and a maintenance allowance while participating in rehabilitation.

Once an injured worker is determined to be unable to return to his/her previous type of work, the employer and employee together select a rehabilitation counselor who will determine whether vocational rehabilitation is feasible. If rehabilitation is possible, then a suitable rehabilitation plan is developed. The goal of a rehabilitation plan is to return the injured worker to suitable employment or self-employment that offers the opportunity for the worker to be restored to a position of maximum self-support as soon as reasonably possible.

Like temporary disability benefits, the maintenance allowance payable to a worker while in rehabilitation is designed to replace two-thirds of the income for lost wages. The maximum prescribed by law for the maintenance allowance is lower than the maximum payable by temporary disability. The worker may supplement the maintenance allowance with advances from permanent disability benefits up to the level where the worker is receiving the same weekly amount as received under temporary disability benefits. Total costs for rehabilitation are now limited to a maximum amount prescribed by law for workers injured on or after 01/01/04.

For dates of injury on or after 01/01/03, injured workers with legal representation may settle rehabilitation in a lump sum.  Vocational rehabilitation does not apply for dates of injury after 01/01/04.


Supplemental Job Displacement Benefit (for injuries after 01/01/04)

This benefit acts as a nontransferable voucher for education-related retraining and/or skill enhancement that is payable to a state approved or accredited school if the worker is injured on or after 01/01/04.  To qualify for this benefit, the injury must result in permanent disability, the injured employee does not return to work within 60 days after temporary disability ends, and the employer does not offer modified or alternative work. There is a maximum voucher amount set by law and the amount varies based upon the extent of permanent disability.

Death Benefits

When a worker is fatally injured on the job, reasonable burial expenses are paid up to the current maximum set by law. Additionally, qualified surviving dependents may receive support payments for a period of time. These benefit payments are usually paid at the same weekly rate as the maximum temporary disability benefit. The total death benefit amount of support payments depends on the number of dependents and whether they are partially or totally dependent.

How Is Coverage Structured in a Workers Compensation Policy?

Workers Compensation coverage is offered under Part One of a Workers Compensation insurance policy. In Part One, the insurance company agrees to promptly pay all benefits and compensation due to an injured worker. These payments are imposed on the employer by Workers Compensation law or laws of the state or states listed on the Declarations page of the policy. Workers Compensation insurance is considered the exclusive remedy for injured employees. What this means is that an employer assumes absolute liability for all worker injuries and the Workers Compensation benefits are the remedy and sole source of funds for the injured worker. An injured employee covered under Workers Compensation cannot sue his/her employer for damages.

Despite the fact that Workers Compensation is considered to be the exclusive remedy for employees with work related disabilities, Employers Liability insurance can provide important coverage in addition to Workers Compensation insurance. Employers Liability is offered under Part Two of a Workers Compensation and Employers Liability insurance policy. Employers Liability Part Two protects the employer against instances where an employee's injury or disease is not considered work related. Occupational injuries that do not occur in the course of employment are not covered under Workers Compensation law and are therefore not compensable under Workers Compensation Part One. You may want to contact a licensed commercial broker-agent to discuss Employers Liability coverage as a part of your Workers Compensation policy.


Who Is Required to Purchase Workers Compensation Insurance?

All California employers must provide Workers Compensation benefits to their employees under California Labor Code Section 3700. If a business employs one or more employees, then it must satisfy the requirement of the law.

Sometimes a business owner (sole-proprietor) may desire to purchase Workers Compensation insurance to cover himself/herself only. The inclusion of a sole-proprietor must be clearly stated in the Workers Compensation policy or must be added as a coverage endorsement to the policy. Since Workers Compensation insurance is a type of liability insurance where the employer assumes complete liability for all worker injuries, a Workers Compensation policy for a sole-proprietor may not be the best choice.

Purchasing health, life, and/or disability income insurance can be a viable option to Workers Compensation for a sole-proprietor. Contact a licensed commercial broker-agent or a licensed personal lines broker or agent for further information and consultation.

Executive officers and directors of corporations must be included in Workers Compensation coverage, unless the corporation is fully owned by the directors and officers. If the directors and officers fully own the corporation, then they may elect to be excluded from Workers Compensation benefits. Fully owned corporations may want to discuss the option to include or exclude their officers and directors with a licensed commercial broker-agent.

California Labor Code Section 3351 defines who is an employee, and therefore who can be covered under a Workers Compensation policy. Whether a business is a sole-proprietorship, a partnership, or a corporation, it is beneficial to develop a working relationship with a reliable, competent broker-agent who can explain coverage eligibility issues and present options based on the organization model of a business.

How Is Workers Compensation Insurance Purchased?

Employers must purchase Workers Compensation insurance from either a licensed insurance company or through the State Compensation Insurance Fund (SCIF). Employers may also have the option to self-insure for Workers Compensation.

A commercial broker-agent can assist a business with purchasing Workers Compensation insurance from a licensed insurance company and can assist with information on SCIF and self-insurance. Also, information on insurance companies licensed to sell Workers Compensation insurance and an online rate comparison of the top 50 Workers Compensation insurers can be accessed on the California Department of Insurance (CDI) Web site at

SCIF is a state-operated entity that exists in order to transact Workers Compensation on a non-profit basis. SCIF competes with private Workers Compensation insurance companies for business and also operates as the insurer of last resort if private companies are not willing to offer Workers Compensation insurance. If a business is interested in SCIF, then they can contact SCIF directly by using the information provided in the "Resources" section of this brochure or they can contact a licensed commercial broker-agent.

To become self-insured, a business must obtain a certificate from the California Department of Industrial Relations, Office of Self-Insurance Plans. Private employers have to post security as a condition of receiving a certificate of consent to self-insure. Self-insurance is only a viable option for very large, stable employers. For complete information on Workers Compensation self-insurance, contact the Department of Industrial Relations, Office of Self-Insurance Plans with the information shown in the "Resources" section.


What Happens to an Employer Who Does Not Purchase Workers Compensation Insurance?

Employers who fail to purchase Workers Compensation insurance are in violation of the California Labor Code. The Director of the Department of Industrial Relations has the authority to issue a stop order against any company who is discovered to be unlawfully uninsured for Workers Compensation. A stop order closes down business operations until Workers Compensation insurance is secured. Besides issuing a stop order, the Director can assess fines based on whether a company has been discovered to be unlawfully uninsured through normal investigation or through the filing of an injured workers claim with the Uninsured Employers Fund. Failure to comply with a stop order can result in a $10,000 fine, while the fine for failure to carry Workers Compensation insurance is $1,000 per employee. Employers can be prosecuted for insurance fraud for willful failure to secure Workers Compensation insurance as prescribed by law. Also, if Workers Compensation is not purchased, an employer opens himself/herself up to liability lawsuits from injured employees. Exclusive remedy protection does not apply if Workers Compensation insurance is not in force at the time of employee injury.

What Is the Uninsured Employers Fund and the Subsequent Injuries Fund?

When a work-related injury or illness occurs to an employee, and the employer is unlawfully uninsured for Workers Compensation, the employee can file a claim with the Uninsured Employers Fund. The Uninsured Employers fund steps in and handles Workers Compensation claims when the employer has secured no insurance or has failed to pay or post a bond in order to pay the compensation owed the employee due to work-related injury or illness. An attempt is made by the Uninsured Employers Fund to recover any amount paid on behalf of an uninsured employer. Please see the "Resources" section of this brochure for contact information regarding the Uninsured Employers Fund.

An employee who has a previous permanent disability or impairment and suffers a subsequent workplace injury or illness may be eligible to receive additional compensation from the Subsequent Injuries Fund. The combined permanent disability must be at least 70% to qualify and additional eligibility requirements must be met. It is important to note that employers are not liable under Workers Compensation for the combined disability of an injured worker. An employer is only liable for that portion of compensation that is owed to the worker from the later (not previous) injury. For further information on the Subsequent Injuries Fund, see the contact information located in the "Resources" section of this brochure.

How Is Workers Compensation Premium Calculated?


Workers Compensation premium calculation is based upon how employees are classified according to their specific work duties and the rate assigned to each corresponding employee classification. Classifications are developed and assigned by the Workers Compensation Insurance Rating Bureau (WCIRB) in most cases. Workers Compensation insurers working with the WCIRB generally use the classification codes the WCIRB provides when rating a workers compensation policy. Insurance companies are allowed to develop and submit their own classification system to the CDI for approval, but this is uncommon due to the strict standards required to file a separate workers compensation classification system. The WCIRB provides a policyholder ombudsman who is available to answer questions from employers on classification, experience modification, and rating issues. Please see the "Resources" section at the end of this brochure for contact information on the WCIRB and their policyholder ombudsman.


Open Rating

Workers Compensation insurers assign a specific rate to each occupational classification code. These rates must be filed with the CDI. Currently, California Workers Compensation insurers operate under an "open" rating system. This open rating system means that individual companies set rates based on their ability to adequately cover losses and expenses in each classification (occupational business class). Open rating requires that all Workers Compensation insurers file their rates and all applicable supplementary rate information to the CDI. Rate approval is based on many factors. One of the most important factors for rate approval is rate adequacy. Rates must be adequate to maintain the solvency of an insurance company. Adequate rates also act to secure the proper surplus monies insurance companies are required to have in order to meet potential and continuing claim obligations. The Insurance Commissioner will not approve rates if they are inadequate to cover an insurer's losses and expenses, unfairly discriminatory, or create a monopoly in the marketplace. The Commissioner does not have the authority under law to disapprove rates that may be considered excessive only.

Premium Modification

The classification code with its corresponding rate is the first part of the rating formula. The rate itself is expressed in dollars and cents and is multiplied by each $100 of payroll per classification. The payroll for each class is estimated and then multiplied (per each $100 of payroll) by the applicable rates. The sum of the equation is referred to as the "base" premium. The base premium continues to be modified (increased or decreased) using rating plans (usually schedule or judgment rating) and by experience modification. (Please see the "Glossary" section for definitions of schedule and judgment rating.)

rience Modification

The experience modification is calculated from loss information that an insurance company is required to submit to the WCIRB on an annual basis. The WCIRB uses a mathematical formula approved by the CDI to calculate an experience modification for each employer. The formula takes into account reported paid losses, claim loss reserves, and payroll amounts for a specific experience period (usually the prior three complete years of workers compensation coverage). The experience modification indicates the average loss experience of employers throughout a similar industry and acts as a means of comparison between employers. When the experience modification is applied to the class rate, along with any other modifications (schedule or judgment), the final rate is multiplied per $100 of payroll and the estimated premium is established.

Prospective Rating

The type of basic Workers Compensation rating formula illustrated above is called prospective rating. While Workers Compensation premiums can be calculated using different rating plans (such as dividend plans or retrospective rating), prospective rating is the most common Workers Compensation premium calculation rating method used currently. Businesses interested in learning more about Workers Compensation rating methods should contact a licensed broker-agent for further information and discussion regarding this topic.


Premium Audit

The final premium of a Workers Compensation policy cannot be calculated until the policy term is over and the employer's payroll records have been audited. The final audit of payroll records determines if the initial payroll estimate was either high or low. If the payroll has gone up from the estimate, then the employer will owe additional premium. If the payroll has gone down from the estimate, then the insurance company will owe the employer a return premium. Since many companies experience fluctuating payrolls, some workers compensation insurers offer a monthly payroll reporting option. If an employer does not qualify for monthly reporting (usually due to payroll size), then the employer can work closely with their broker-agent or company underwriter to report any large payroll fluctuations during the policy term. Corrected payroll estimates during the policy term can help minimize the possibility of a large premium audit bill or a large return premium, which can significantly affect the cash flow of a business.

Employers need to be aware that their Workers Compensation company has the right to audit payroll records at anytime. Usually this right is reserved for the final audit, but an insurance company can conduct interim audits as well. Failure to comply with an insurance company audit can lead to cancellation or non-renewal of a policy. Also, insurance companies can use all legal means at their disposal to collect outstanding premium. It is important to know that deliberate underreporting of payroll is considered insurance fraud and can be prosecuted to the fullest extent of the law. The WCIRB also has the right to conduct an audit of payroll records, which allows them gather information on experience modification and the proper classification categories for a specific employer.

Does the CDI Handle Workers Compensation Claim Issues?

It is important to note that most disputes between injured workers and Workers Compensation insurers do not come under the jurisdiction of the CDI1. The California Department of Industrial Relations, Division of Workers Compensation assists employers and employees with Workers Compensation claims. If an employer or employee has a question or concern regarding a Workers Compensation claim he/she can contact the Information and Assistance Unit of the Division of Workers Compensation.

When disputes arise regarding a Workers Compensation claim, the Information and Assistance Unit upon contact will attempt to resolve the dispute. If they are unable to resolve the dispute, then a formal application for adjudication (dispute resolution) can be filed with the Workers Compensation Appeals Board. The Information and Assistance Unit may be able to help filing the application to the Appeals Board unless an attorney has been retained. The Workers Compensation Appeals Board has exclusive jurisdiction over dispute resolution.

An employer or employee can contact the California Department of Industrial Relations, Division of Workers Compensation using the information provided in the "Resources" section of this brochure. The "Resources" section includes specific contact information for the Information and Assistance Unit and Workers Compensation Appeals Board. Also, an employer should be able to discuss any general Workers Compensation claim issue with their broker-agent or discuss a specific claim with the claim adjuster that has been assigned to the claim by their Workers Compensation insurer.

1In specific instances, CDI does investigate the fraudulent submission, or denial, of Workers compensation claims (California Insurance Code Section 1871.4).

What Workers Compensation Issues Does the CDI Handle?

The CDI primarily deals with rating and underwriting issues involving Workers Compensation insurance. Consumers contact the CDI with a variety of Workers Compensation rating and underwriting concerns. The following is a list of common consumer issues under the jurisdiction of the CDI regarding Workers Compensation insurance:

  • Insurer compliance with filed rates
  • Rating errors
  • Classification and experience modification disputes
  • Failure to provide loss history reports
  • Cancellation and nonrenewal notice
  • Audit disputes
  • Dividend plans
  • Broker-agent handling
  • Insurance fraud

California Code of Regulations (CCR) 2509.40 - 2509.78 lists detailed procedures for appeals regarding experience modification and classification disputes. Please contact the CDI through the information given in the "Talk to Us" section of this brochure when you experience Workers Compensation rating and underwriting difficulties. In most cases, we can assist consumers to resolve workers compensation issues involving rating and underwriting. If it is determined that the CDI does not have jurisdiction, we can refer the consumer to the appropriate state agency for assistance. Also, it is important to contact the CDI regarding any suspected Workers Compensation fraud. Fraud reports can be filed with the CDI on an anonymous basis. The more complete and credible the information, the greater the chance of apprehending and prosecuting those involved in Workers Compensation fraud.

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