2 Resources

Ownership Rules

In-depth, generic explanation of why workers compensation experience follows the business owner.;

Common Ownership
Each legal entity that has common ownership with another entity will have its workers compensation experience combined for one experience rating modification, even if each entity maintains separate insurance policies. By common ownership, we mean if a person, group of persons, or a legal entity owns more than 50% of each entity.

The rule is found in the NCCI Experience Rating Plan Manual, Rule 3.D. Combination of Entities. This manual is used in most states. The rule bases majority ownership interest on the following:
    • Voting stock
    • Majority of owners
    • Majority of board of directors
    • Participation of each general partner in the profits
    • Ownership interest held by an entity as a fiduciary

Note that the rule makes no mention of who provides the money or funds. For instance, a county governmental unit and a county hospital may or may not be combinable even if the county funds the hospital. The county has commissioners. The county hospital has a board. As separate legal entities they can have separate policies. If they have a majority of individuals serving as commissioners and board members, they are combinable. In addition, you could also look at the charter creating the hospital. It might be a creation which could be considered a “wholly-owned subsidiary” of the county, where the commissioners have ultimate decision making authority.

Ofcourse, the ICRB can only act to combine experience when we become aware that common ownership exists between or among entities. We ask that the employer complete and sign an ERM-14 form or show the ownership status on company letterhead. If the combined entities create an interstate rating, then the NCCI would have jurisdiction in making a ruling and revising the experience rating(s).
Entity Definition
Below are excerpts of rules from the elow are excerpts of rules from the Experience Rating Plan Manual which is used in the majority of states, including Indiana.
Rule 1.C. Definitions
4. Entity
(Exceptions: TX)
An entity is an individual, partnership, corporation, unincorporated association, fiduciary, or other legal entity.
5. Risk
A risk is all entities eligible for combination under this Plan, regardless of whether insurance is provided by one or more policies or insurance carriers. A risk may be:
A single entity, or
Two or more entities that qualify for combination according to Rule 3-D.
Rule 3.D Combination of Entities
(Additional Rules: KS, OR, TX) (User's Guide: AZ)
The combination of two or more entities requires common majority ownership. Combination requires that:
The same person, group of persons or corporation owns more than 50% of each entity, or
An entity owns a majority interest in another entity, which in turn owns a majority interest in another entity. All entities are combinable for experience rating purposes regardless of the number of entities involved.
Refer to the User's Guide for examples.
Determination of majority ownership interest is based on the following:
Majority of issued voting stock.
Majority of the owners, partners or members if no voting stock is issued.
Majority of the board of directors or comparable governing body if a. or b. is not applicable.
Participation of each general partner in the profits of a partnership. Limited partners are not considered in determining majority interest.
Ownership interest held by an entity as a fiduciary. Such an entity's total ownership interest will also include any ownership held in a nonfiduciary capacity.
For purposes of this rule, fiduciary does not include a debtor in possession, a trustee under a revocable trust, or a franchisor.
Refer to the User's Guide for examples.
Multiple Combinations
More than one combination of entities may be possible within a group of entities. The selection of combinations is based on the combination that involves the most entities.
If Rule 3-D-3-a does not result in a single group with a majority of entities, the combination will be based on the group that has the largest amount of estimated standard premium. The estimated standard premium is based on the policies in effect at the time of the combination.
The experience of any entity may be used in only one combination.
Refer to the User's Guide for examples.

Continuation of Experience
Frequently people have the perception that the experience rating plan rules pertaining to the continuation of experience, have been inappropriately applied, especially when poor experience (debit mod) has resulted. The rule is designed to allow the experience of a business to always follow that business, regardless if new owners come on the scene.

Previous Rule
The current rules were approved for use in Indiana and over 30 other states effective July 1, 1990. Prior to that date, the rules dictated an entity's experience be excluded from an experience rating simply due to a qualifying percentage change in the ownership interest. A simple paper transaction allowed an employer to avoid an experience modification without any significant change in operations.

Attempts to Avoid Debit Mods
With the price for workers compensation insurance increasing substantially in the 1980's, so too the attempts to avoid paying these costs. In far too many instances, this was accomplished by taking measures to avoid debit experience modifications. One of the more common tactics included simply dissolving an entity which had developed a debit modification. A new entity was then established which would operate the same type of business, in the same manner, often at the same location. This, and other types of modification evasion tactics, were defeating the intent of the experience rating plan.

For additional explanation on this topic, refer to the attached document which contains the filing memorandum for Item Filing E-1261 effective July 1, 1990.

Transfer of Experience
The following scenarios help to understand the transfer of experience from one business to another.

Facts: Company A sold its business to Company B. The owners of former Company A then started a new Company C.

Question: Does the experience of Company A follow Company B (the acquiring company) or Company C (same owners of former Company A)?

Answer: The experience follows Company B. Reference Experience Rating Plan Manual Rule 3.E.1. Transfer of Experience "the experience for any entity undergoing a change in ownership will be retained or transferred to the experience ratings of the acquiring, surviving or new entity unless specifically excluded by this Plan."

Facts: Company X sold a portion of its business to Company Y. The owners of Company X continue to operate their now smaller business.

Question: Does the experience of Company X follow Company Y (the company that acquired a portion of the business) or stay with Company X?

Answer: In such cases we will ask Company X's carrier to separate payroll and loss information along the same lines as the sale of assets. This may be simple where two distinct divisions are involved, and impossible in other cases. When segregated data is provided, we will compute separate experience modifications for the two entities. Otherwise, Company X typically will retain the existing mod and Company Y will not initially be experience rated. When significant assets are transferred, however, the ICRB may mandate a different approach.

The exclusion rule applies only in rare instances when all of the three changes listed below occur:
      • Change in ownership
      • Change in governing class
      • Change in process and hazard of operations

Source: Experience Rating Plan Manual Rule 3.E.2. Exclusion of Experience.

As a result, the plan rules were revised to provide for a continuation of past experience when a change occurred. Since the types of transactions which resulted in avoidance of debit mods under the old system included more than outright purchases of a business, the revised system addresses issues such as the sale, transfer or conveyance of ownership interest or assets. This new system was strongly supported by all segments of the workers compensation industry. We should note that the new rules were not disapproved in any state.

The principal intent of the new system is to provide for the continued utilization of experience whenever a risk undergoes any type of change. A singular exception involves a transaction in which the business is changed so substantially by the new owner that the governing classification, as well as the process and hazard of the operations change. In such an instance, the past experience is not a useful indicator.

Consider an example in which a bakery is purchased and transformed into a clothing store by the new owner. Obviously, the past experience of the bakery would be inappropriate for experience rating a clothing store. We understand that the application of this exception will be rare. This is by design and intentional. Only in such cases will the past experience, be it good or poor, be eliminated.

The rule regarding process and hazard becomes an issue only in those rare instances in which the governing class changes. It was recognized that certain types of businesses, particularly within the contracting classifications, could change governing classification easily. While a bakery or trailer manufacturer will have the same classification from year to year, a contractor's governing classification could change simply based on the type of work undertaken in a given policy year. Nonetheless, the business is that of a contractor whose process and hazard does not substantially change. Generally, the past experience of that contractor, be it good or poor, will continue to be utilized in future experience ratings of any new owner.

The rules do not provide an all-encompassing list of criteria for what constitutes a change in process and hazard, simply because such a list would be extremely costly to develop, maintain and administer. It was anticipated that few instances would occur in which a new owner would substantially and promptly change the operation sufficient to result in a governing classification change. It was further anticipated that a determination of whether the process and hazard had substantially changed would be made on an individual risk basis, based on investigation and review of the facts involved. One example of a change in process and hazard would be that of a manual assembly operation converted by a new owner to include the use of robotics in the assembly process. In such an instance it is easy to see that the process and hazard of the operation substantially changed.

Suggested Rules and Why They Are Not Used
The following are some observations regarding the use of other criteria which have been considered, but rejected, as alternatives to the current rule in determining if experience continues or not.

a) Arm's length transaction - A suggestion is that somehow a determination be made as to whether an appropriate price was paid for the assets purchased. Such a determination would probably have to be made by an outside party, involve judgment, and be subject to debate.

This suggestion to establish definitive criteria would be beneficial in some instances but we do not feel such criteria would prevent all disputes. In addition, they would still be subject to some degree of judgment. If detailed procedures were developed, tested and litigated, significantly increased administrative costs would result.

Also suggested is that some validity be given to the fact that there is "no connection" between the buyer and seller. Even if it could be determined that the parties involved had no prior "connection", it would be a moot point in a system designed to ensure that past experience continue to be utilized, except in the rare circumstance already discussed.

b) Common Ownership or Management - The criteria that a determination be made as to whether or not common interest or management exist between the prior and new entity was essential to the ownership rules prior to 1990. The current rule is intended to retain the experience of a business and transfer that experience to the new owner. This is a fundamental change from previous ownership rules that many in the insurance industry were familiar with.

c) Extent of Common Labor - Another suggestion is that if the same employees are kept in the new operation, the experience should be continued. If an employer retained some, but not all of the employees of the prior owner, then the argument is that this should be the basis for not transferring the past experience. While this issue was considered when we developed the new ownership rules, we concluded for a number of reasons that employees should not be considered. For example:

1) Most ownership changes are reported to rating organizations more than 6 months after the date of change. During this timeframe, there is normal turnover or possibly significant turnover in the employee base. In addition, records associated with such changes may be unavailable after an ownership change.

2) Establishing a percentage of employees retained by the new owner that represents a number substantial enough to warrant continuation of the previous entity's experience is suggested. 50%? 75%? 100%? Wouldn't such a criteria provide an incentive in some cases, particularly for smaller employers, to fire workers simply to avoid the application of poor loss experience? This is not an issue that could be effectively administered by a rating organization, nor is it one which would be acceptable to regulators countrywide.

d) Extent of Operations and Management Changes - A suggestion is that if there is a significant change in management, there could be an expectation that the workers compensation experience could be significantly different. "Management" is a term which can differ greatly depending on the type of operation. It is not an issue which is considered under the new ownership rules. If undergoing a significant change in "management" would provide an employer with a means to have previous experience eliminated, it would be quite easy to make that argument. One example would be to simply change job titles. If the true management direction of an operation has changed, it will be reflected in future experience ratings. The success of any management change can be measured somewhat by the experience modification results. In any event, past experience, be it good or bad, is transferred.

We are careful that the ICRB administers the rules in a consistent and fair manner. If the past experience develops a credit or debit experience mod, the new owner receives the benefit or burden of such experience. Another important point is that the rules are not applied differently based on any contention that the risk was not operating in an outright attempt to avoid a debit modification.

ERM-14 Form
Attached below is the ERM-14 Form - Confidential Request for Information, revision 2/20, in Adobe Acrobat format (PDF file). You can open the file and then print the form to fill out.
[ERM14Form.pdf] The form may be completed on-line, from the NCCI website.  
The from is required. Please refer to the first paragraph on the form:
The purpose of this confidential form is to obtain ownership information to assist in calculating premium for your workers compensation insurance policy. Your policy requires that you report ownership changes, and other changes as detailed below, to your insurance carrier in writing within 90 days of the change. If you have questions, contact your agent, insurance company, or the appropriate rating organization. Incomplete information or a missing signature may result in a delay in processing.
The ownership information required on this ERM-14 Form can also be submitted in narrative form on the letterhead of the employer, signed by an owner, partner, member, or executive officer.

In regards to the WC Policy requirement, refer to endorsement WC 00 04 14:
Forms Manual of Workers Compensation and Employers Liability Insurance
"Experience rating is mandatory for all eligible insureds. The experience rating modification factor, if any, applicable to this policy, may change if there is a change in your ownership or in that of one or more of the entities eligible to be combined with you for experience rating purposes. Change in ownership includes sales, purchases, other transfers, mergers, consolidations, dissolutions, formations of a new entity and other changes provided for in the applicable experience rating plan manual.
You must report any change in ownership to us in writing within 90 days of such change. Failure to report such changes within this period may result in revision of the experience rating modification factor used to determine your premium.
Note:  Use this endorsement on all policies to notify the insured that changes in ownership, as defined in the Experience Rating Plan Manual, must be reported to the insurer within 90 days of the change."
Indiana Secretary of State Business Services Online

The Secretary of State's office provides Business Services Online where you can find registered business ownership. If there are any discrepancies between ERM-14 ownership information and this site, we can request additional information such as board minutes or statements from the business owner(s) to verify proper ownership. 



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