Business ownership, employees, and operations — all have an impact on experience modifications.
The rules concerning ownership and experience rating have been crafted to ensure that an experience modification accurately reflects the history of a business owner and the history of any businesses that may be acquired and operated without significant changes to employees or operations. These rules can be found in the Experience Rating Plan. The Experience Rating Plan is part of the California Code of Regulations and is approved by the Insurance Commissioner.
While in most cases an experience modification is based upon the payroll and loss history of a single entity, it is also common for an experience modification to be based upon either the combination of multiple commonly-owned entities or the loss experience of an acquired entity or operation. To understand exactly what data goes into an experience modification and how ownership impacts experience rating, it is important to understand the distinction between a "risk" and an "entity."
An "entity" is the legal description of the business that is being insured: individual, joint venture, partnership, limited liability partnership, corporation, limited liability company, unincorporated association, trust, receivership, or estate. A "doing business as," or "dba," is not an entity. It is common to have multiple commonly-owned entities on a single policy or in a single WCIRB file.
A "risk" is the California insured operations of an entity or commonly-owned entities. The risk is the umbrella under which all commonly-owned entities are grouped. A policy cannot insure and an experience modification cannot apply to multiple risks.
Stanley owns a restaurant and an automobile repair shop. The payroll and loss data from these two entities will be combined to produce a single experience modification — regardless of whether these entities are covered under a single policy or under separate policies. The combination of these two entities forms a single risk for experience rating.
For experience rating purposes, all entities that share in excess of fifty-percent common ownership are combined under a single risk. A single experience modification is issued to cover all operations of the risk — or all commonly-owned entities. Commonly-owned is defined as the same person or persons owning a majority interest in each of the entities.