For companies suffering from increasing mod rates, and with insurance premiums on the rise, it is no shocker that your bottom line is being effected. Sometimes a solid alternative is to combine entities to ease these costs. 

How Can it Help?

As a business owner, if you have several organizations under the same management and control, it may help if the entities are combined for the purpose of experience modification calculations. It used to be that if you created a new corporation and then transferred the ownership to it, you could effectively reduce your worker's comp mod factor back to 1.00.

Then the beloved NCCI stepped in and killed that strategy and implemented a new three point approach for ownership changes.

The NCCI 3 Point Rule

Simply put, when there is an ownership change in a company, the experience rating of the former company is acquired by the new surviving company or owner(s).The only way this experience rating does not transfer to the new organization is if all three of the following conditions are met:

1.      There must be a material change in ownership. If there is any ownership continuation, the interest must have been less than one third ownership before the change or less than one half ownership after the change.

2.      There must be a change in operations that is enough to result in a reclassification of the governing class code.

3.      There must be a modification in the process and hazard of the operation.

The good news is if all three conditions are met, the experience of the previous organization(s) is excluded from the new organization. In reality, this is unlikely to be the case because it would be like an RV repair shop being sold and reopened as an accounting firm. If the new owner does not have an established mod factor, the mod of the new entity becomes 1.00 when the experience is excluded because the three points listed above have been met. If not, a mod will be calculated from the combined experience of the old entity and the new one.

Business owners need to understand that experience and loss control is a function of an entity's ownership and process. The new rules negate the past attempts by insureds to get around the rating plan. For example, if an insured who has earned a high mod in one state because of poor experience, that same insured cannot open a "dummy" corporation in another state and then transfer ownership to lower the mod on the remaining corporation and then give the new on a 1.00.

For more information about reducing your modification rate, contact an insurance professional at Skyline Risk Management, Inc. (718) 267-6600 to help address your concerns.