Inheriting A California Experience Modification

If Experience Modifications (Xmods) aren’t difficult enough to understand, it is perhaps even more difficult to understand what happens when you buy a business that has an Xmod.

As a business owner in California, you’re subject to receiving an Xmod on your workers compensation policy.  Qualifying for an Xmod is based on the premium you pay for your workers comp policy.  Your Xmod can either be a discount or a surcharge, based upon the number of claims you’ve had, the total dollar amount of claims paid for your employees’ injuries, and the amount of payroll you’ve paid.  Your Xmod sticks with you wherever you get insured.  So whether you get insurance with Company A or Company B, your Xmod will remain the same.

(If you want to know more about Xmods, here’s an explanation from the WCIRB, the organization that determines every business’s Xmod: www.wcirb.com/guide-to-workers-compensation/experience-rating.)

Where it gets a little tricky is if you acquire a business that already has an Xmod.  First congratulations on buying a business!  Best of luck and I commend your for your entrepreneurial spirit.  Second, there’s a possibility that that business’s Xmod, if it has one, will become your Xmod.

How does this work?  And what does it look like?

Let’s say a Mr. Art Vandelay is starting out as a brand new business owner by purchasing an existing business – Pennypacker Industries, Inc. – from a Mr. H.E. Pennypacker.  Mr. Vandelay doesn’t outright by the corporation, but rather buys all the assets – including the employees – from Pennypacker, and incorporates it into a new corporation: Vandelay Industries, Inc.

Let’s say that Pennypacker Industries was in the import/export business and had 50 employees.  Pennypacker had a lot of employee injuries and therefore a high Xmod of 125%.

Once Vandelay Industries gets workers comp insurance, the WCIRB will ask: “Did more than 50% of your employees in the first 90 days since buying Pennypacker’s business also work for Pennypacker during the 90 days before the sale?”  Since Vandelay acquired 100% of the employees, the answer is “Yes.”  In that case, the WCIRB will say that a “change in status” has not occurred, and that Vandelay Industries will inherit Pennypacker’s Xmod.

What this means is that Vandelay will be charged an additional 25% on its workers comp because of the fact that employees came from Pennypacker. Let that sink in.  What if Pennypacker had a 150% Xmod?  200%?  Ouch!  On the bright side, if Pennypacker had a stellar claims record resulting in a discounted Xmod, Vandelay would have also inherited the credit.  So it works both ways, which is nice.

Now let’s say Vandelay industries has established itself as a leader in the import/export business and is positioned to acquire another import/export business, Varnsen Industries, Inc.  Vandelay now has 75 employees and Varnsen has 25.

The WCIRB will ask the same question: “Did more than 50% of your employees in the first 90 days since buying Varnsen’s business also work for Varnsen during the 90 days before the sale?”  This time Mr. Vandelay will say “No.  The 25 new employees constitute 25% of our work force.”  And the WCIRB will say, “Noted.  There is a change in status of Varnsen employees therefore your Xmod shall remain as is.”

And that’s how it works.  It should be mentioned that there are other circumstances that can affect Xmods, such as changes in operations (this would be where Vandelay buys Pennypacker and rather than continuing as importers/exporters, uses the employees for something else, such as selling latex), but this is where it starts.

The bottom line is: if you are buying a business, be aware that 1) you can inherit the Xmod of the selling entity and 2) it will have an effect on your expenses.  As an insurance agent, I’ve seen a buyer benefited greatly by purchasing a business with a low Xmod, thus making the purchase affordable, and I’ve seen the opposite: a new business struggling to be profitable because it inherited an unusually high Xmod.

ELI GILLESPIE

I’m the Commercial Producer and Manager at Gillespie Insurance Services. If you have questions or want to know more about inheriting Xmods, please call me at 909-793-6878 or email at eli@giscoverage.com.