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Classification By Analogy – When No Class Code Describes Your Business

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When No Code Fits – Classification By Analogy

The term Classification by Analogy generates many questions on how companies are rated  by the rating bureaus such as NCCI and the WCIRB. 

One of the most confusing terms associated with classification codes is the classification by analogy. This is especially true if the class codes were changed at the time of the premium audit.  Last week, I covered how a company’s workers compensation classification codes may change as a company grows over time.

Graphic of Five Bulb Classification By Analogy With One Bulb Open
123RF

Classification By Analogy is the interpretation of what Workers Comp Classification Codes are the closest to the job functions in a company. The insurance company looks at each classification code as a level of risk. These are “guesstimations” as there is no exact classification code that matches a job function or employee’s job description. The most important word is interpretation. No one knows your business as well as you do.  However, the correct class codes for your business can be a tricky matter.

One of the red flags on Workers Comp audits is the use of Not Otherwise Classified (NOC) when classifying some of the job functions in your company by analogy. Over time, most rating bureaus have reduced the number of class codes. This has given rise to many of the old classifications that better described your business being combined into a more general class code or NOC.

One of the caveats with challenging or questioning a classification code that is analogous to your company’s job functions is the class code that you think more closely matches your company may end up costing more money that the original one.  This is especially true if the Experience Mod is above a 1.4.  

As always, if you feel you that there is something wrong (gut feeling), you may want to call in an expert.

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4 Responses

  1. NOC codes are codes of last resort, that are only used if no other codes describe your business. When classifying a business, a code that is specific to your business is best applied. A bank is assigned to a bank code, an engineering firm to an engineering code, etc.

    When there is not a perfect match, a business is assigned by analogy which is the closest fit based on what the business does or the process that it uses to make the product or do the service it provides from the top down.

    You cannot assign a code based on the individual employees duties, but from the business in total down to the employee. The main code dictates what codes are available to the individual employee.

    To add perspective if an employee looks through a window, he only sees the window and scenery outside of the window only. If you look at the business as a whole, you see a industrial, commercial, residential building, or even a tree house.

    If you have an engineer drawing plans for your construction company, it would be an employees perspective that the engineering code would apply to his duties for w/c.

    However from the top down business perspective, the company is in the construction business, and the engineer is in direct support of that business. The engineering code would not apply.

    Instead a standard exception (clerical, salesperson) or construction code would apply depending on what other duties he has away from the office.

    Yes, you should question and request clarification of any change in codes due to an audit or inspection. Knowledge and a clear understanding of how the codes affect your business is always in your best interest to know.

    There may have been a change to existing codes or new codes in your state, your operations may have changed from the prior year, or you have added a new type of operation to your business that needs to be separately rated.

    Keep asking questions, Thank You, CG

  2. All of the prceding material makes sense but I am concerned that readers may become confused over the three concepts introduced. The three concepts are classification assignment by analogy, Not Otherwise Classified, and classifying a business. Let’s start with the last concept.
    Per manual rules we assign one basic classification to a business rather than classifying the individual employments within the business. However some businesses are not described by the 550 common NCCI classifications or the 200 or so state special classifications. In these cases the assignment is made by analogy. Say someone makes fiberglass items. There is no classification wording that offers a home for this manufacturer but there are plastic manufacture codes that are assigned to fiberglass work because they are so close in process or product. The code is probably not a NOC classification. Not Otherwise Classified means something else.

    NOC provides a specific home for operations not described by another classification. For example Excavation NOC, code 6217, applies when you are not engaged in other specific earth work operations and is also specifically intended for general excavators who are doing cellar holes, grading lots, digging trenches, completing house packages (earth work). Employers are assigned here specifically because of the work they do, not necessarily by analogy.
    I agree that despite 550 NCCI classifications and 200 more specials, there is not a perfect classification wording/assignment for every business. Code 6204, Drilling NOC, applies to water well drillers and other who are not doing oil/gas drilling. The Plastics Mfg NOC is specifically intended for certin types of Plastic Mfg, Applicable to the mfg. of plastic goods by such operations as machining, bending, buffing, or polishing, using raw materials in the form of sheets, rods or tubes. There may also be operations not fitting this description precisely but are assigned to this classification because it fits most closely such as if the employer is doing the same thing with fiberglass.

    As James points out, if you get the gut feeling the business is misclassified, it may well be.

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James Moore

Raleigh, NC, United States

About The Author...

James founded a Workers’ Compensation consulting firm, J&L Risk Mgmt Consultants, Inc. in 1996. J&L’s mission is to reduce our clients’ Workers Compensation premiums by using time-tested techniques. J&L’s claims, premium, reserve and Experience Mod reviews have saved employers over $9.8 million in earned premiums over the last three years. J&L has saved numerous companies from bankruptcy proceedings as a result of insurance overpayments.

James has over 27 years of experience in insurance claims, audit, and underwriting, specializing in Workers’ Compensation. He has supervised, and managed the administration of Workers’ Compensation claims, and underwriting in over 45 states. His professional experience includes being the Director of Risk Management for the North Carolina School Boards Association. He created a very successful Workers’ Compensation Injury Rehabilitation Unit for school personnel.

James’s educational background, which centered on computer technology, culminated in earning a Masters of Business Administration (MBA); an Associate in Claims designation (AIC); and an Associate in Risk Management designation (ARM). He is a Chartered Financial Consultant (ChFC) and a licensed financial advisor. The NC Department of Insurance has certified him as an insurance instructor. He also possesses a Bachelors’ Degree in Actuarial Science.

LexisNexis has twice recognized his blog as one of the Top 25 Blogs on Workers’ Compensation. J&L has been listed in AM Best’s Preferred Providers Directory for Insurance Experts – Workers Compensation for over eight years. He recently won the prestigious Baucom Shine Lifetime Achievement Award for his volunteer contributions to the area of risk management and safety. James was recently named as an instructor for the prestigious Insurance Academy.

James is on the Board of Directors and Treasurer of the North Carolina Mid-State Safety Council. He has published two manuals on Workers’ Compensation and three different claims processing manuals. He has also written and has been quoted in numerous articles on reducing Workers’ Compensation costs for public and private employers. James publishes a weekly newsletter with 7,000 readers.

He currently possess press credentials and am invited to various national Workers Compensation conferences as a reporter.

James’s articles or interviews on Workers’ Compensation have appeared in the following publications or websites:

  • Risk and Insurance Management Society (RIMS)
  • Entrepreneur Magazine
  • Bloomberg Business News
  • WorkCompCentral.com
  • Claims Magazine
  • Risk & Insurance Magazine
  • Insurance Journal
  • Workers Compensation.com
  • LinkedIn, Twitter, Facebook and other social media sites
  • Various trade publications

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