The Hidden Cost of Misclassification: Mastering Workers’ Comp Class Codes for Middle Market Success

In the world of commercial insurance, no phrase inspires more dread—or confusion—than “workers’ comp audit.” Often, the root cause of these audits isn’t fraud or underreporting, but something far more preventable: incorrect workers’ compensation class codes.

In this post, we dive deep into the challenges and strategies behind mastering workers’ comp classifications, a conversation shaped by a compelling podcast discussion between David Carothers and Kevin Ring, lead analyst at the Institute of WorkComp Professionals. Their insights illuminate how agents can avoid audit-triggering mistakes and build more value for middle-market clients.

Why Workers' Compensation Classifications Matter More Than You Think

Many producers gloss over classifications when onboarding a new client. It’s easy to trust the codes that are already in place, especially when the goal is to get the BOR signed and coverage bound. But as Kevin Ring reminds us, this shortcut can become a costly liability.

Misclassification not only creates premium discrepancies but can also expose an agent to errors and omissions (E&O) claims. Furthermore, improper classifications lead to unwarranted disputes with underwriters and unnecessary friction during the audit process.

In the middle market, where risk complexity is high and payroll varies across job roles, getting the class codes right is critical to long-term client retention and profitability.

The Problem with Copying Deck Pages: Why Most Agents Get It Wrong

One of Kevin’s key observations is how many agents rely on prior agents’ work. They request deck pages, jot down the existing class codes, and then quote the business. But as Kevin pointedly notes: “That’s like cheating off the test of the kid who fails everything.”

There’s no way to know if those codes were correct to begin with—or whether the business has evolved since then. Classifications can and do change over time. For instance, recent updates to Code 8720 (estimators) and the consolidation of long-haul and short-haul trucking codes into 7219 are just two examples of how fluid the classification landscape can be.

Agents must treat every new policy as a clean slate, using tools like the NCCI Scopes Manual and direct interviews to validate job roles and exposures.

The Power of Process: How Proactive Underwriter Engagement Solves Classification Conflicts

David shares a highly effective strategy: before coverage is ever bound, he brings the carrier’s underwriter, loss control, claims, and audit personnel onsite for a joint inspection of the client’s operations. It’s an unconventional move, but it sets expectations early and avoids costly surprises.

Why? Because once a policy is bound, the carrier’s audit department holds all the leverage. If you can’t prove your classifications at audit time, you could face significant premium adjustments. Getting audit buy-in up front provides transparency and protects both the agent and the client.

This proactive approach reflects a true risk advisor mindset—not just a quote shop mentality.

Governing Codes vs. Standard Exceptions: Know the Rules

Misunderstanding the difference between governing classifications and standard exceptions is one of the most common errors producers make. The governing classification typically reflects the primary business operations, while standard exception classifications—like clerical, outside sales, and drivers—may be used only if the employee’s duties strictly align with the code’s scope.

However, as Kevin points out, exceptions vary by state. For example, in California, drivers are not considered a standard exception. And in some cases, governing class codes specifically include drivers, making separate classification invalid.

This makes it essential for agents to read the full class code description, not just the title on the deck sheet. The devil is in the details, and assumptions are costly.

Case Studies in Misclassification: From Manufacturing to Maintenance Staff

Nothing illustrates the pain of misclassification better than real-world stories. David recounts an experience with a client that manufactured plastic clamshell containers. Within their massive facility, they had a cordoned-off labeling department operating with swipe-access security and different exposures from the manufacturing line.

Despite the operational separation, NCCI insisted that the labelers be included in the governing manufacturing class code—unless the client created a separate legal entity and payroll. The client complied, but it was a frustrating and costly lesson in how rigid classification rules can be.

Kevin also shared the story of a property management company that had long misclassified its maintenance workers as carpenters, simply because that was the internal title. This led to a $350,000 overpayment across seven years. Once a new agent questioned the terminology and adjusted the classification to reflect actual duties, the problem was solved—but not before significant financial damage had occurred.

Special Rules for Construction and Oilfield: Separating Payroll the Right Way

Construction and oilfield services are two industries where classification rules become even more nuanced. Unlike most industries, where the business is classified as a whole, these sectors allow for payroll to be split by specific job activity—if detailed records are maintained.

Take the case of a contractor who installs toilets, patches roofs, and hangs drywall. If they track payroll by task, each duty can be classified individually. But without those records, all payroll defaults to the highest-rated class code.

However, not all tasks can be separated. For example, code 5645 (residential carpentry under three stories) encompasses all carpentry activities for a general contractor’s direct employees. That includes framing, cabinet installation, and finish work. Without subcontractors and separate records, it all falls under one class.

Understanding these nuances helps producers properly advise clients and avoid audit disputes that arise from poor documentation or misunderstood rules.

Executive Supervisors and Estimators: Beware of Overused and Misunderstood Codes

Two class codes stand out for their potential misuse: 5606 (executive supervisors) and 8720 (estimators).

Code 5606 is frequently misapplied to residential contractors who occasionally supervise jobs but also swing hammers when needed. To qualify, the individual must supervise through designated site foremen and have no hands-on labor. If the title of “foreman” isn’t used—say, they use “lead electrician” instead—it can trigger classification problems during audits.

Similarly, Code 8720 was created to standardize the classification of estimators across industries. Previously, some carriers would put estimators in the same class as the work they estimated (e.g., roofing), while others placed them in 8742 (outside sales). The new code aims to eliminate these discrepancies.

But 8720 comes with a critical caveat: if someone estimates a job and then works on that job, the entire payroll may be disqualified. Recordkeeping is essential, and even then, most producers should err on the side of caution.

Read the Scopes Manual: Stop Guessing, Start Knowing

The single most underused tool in classification accuracy is the NCCI Scopes Manual. Available digitally and for a relatively low annual fee, this guide spells out what is and isn’t included in each classification, often in painstaking detail.

While some states (e.g., California, New York, Delaware) provide their own manuals online for free, agents writing in NCCI states should absolutely invest in access.

As Kevin notes, the old printed manuals were three pages per classification—single-spaced, small font, and densely packed with clarifying examples. If you’re relying on job titles or assumptions instead of reading the manual, you’re gambling with your client’s premium dollars.

Educating Clients on Classification Language

Perhaps one of the most actionable takeaways from the conversation is this: teach your clients to speak audit language. The way they describe their employees to an auditor matters.

In Kevin’s story of the property manager, the long-standing use of the term “carpenter” skewed the auditor’s perspective—even though the workers were performing maintenance. With better preparation, the client could have avoided years of overpayment.

When clients are well-informed, they become your best line of defense during audits and inspections. They can describe duties in alignment with class code definitions and avoid the traps of casual terminology.

Key Takeaways: Become the Expert Your Clients Need

As a commercial insurance producer, your competitive edge lies in precision and education—not quoting faster or promising to “save 10%.” Workers’ compensation classifications are an opportunity to demonstrate real expertise and uncover hidden costs that affect your client’s bottom line.

By mastering class code definitions, reading the Scopes Manual, and taking a proactive approach with carriers and clients, you position yourself as a trusted advisor—not just another agent.

Partnering with experts like Kevin Ring and the Institute of WorkComp Professionals only strengthens your value proposition. In today’s hard market, accuracy isn’t a luxury—it’s a necessity.

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