Workers’ Compensation – Combinability Conclusion

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by Christopher J. Boggs, CPCU, ARM, ALCM

Combinability rules were introduced and explored in the previous article; this commentary will discuss combinability guidelines as they relate to specific insureds. Several combinability concepts will clarified and relevant terms defined.

Combinability Guidelines

Common majority ownership is the basic rule of combinability. When the same person, group of persons or a corporation owns a majority interest in another entity, the owned entity’s loss experience is combined with the owning entity to develop a common (combined) experience modification factor.

The combinability concept seems simple enough, however achieving “common majority ownership” can be accomplished in one of several relational constructs:
The corporation (a “legal person”) owns a majority interest in other entities. When Corp “A” owns a “majority interest” (this term will be defined in upcoming paragraphs) in Corp “B,” the loss experience of both corporations is pooled to produce a single, combined experience modification factor;
The business’ owner(s) (“natural person(s)”) individually or collectively maintain majority interest in more than one entity. If John holds majority interest in Corp “A” and he individually gains majority interest in Corp “B,” the two entities are combined for experience rating. However, if John has majority interest in only one of the two entities, they are not combinable (i.e. John maintains 75 percent interest in Corp “A” but only 25 percent in Corp “B”). To continue, assume that John and Joe combine to own majority interest in Corp “A” and Corp “B;” common majority ownership exists and the experience is combinable;
The corporation combines with some or all of its owners to hold a majority interest in another entity. Corp “A” (again, a “legal person”) maintains 30 percent interest in Corp “B;” John and Joe (100 percent owners of Corp “A”) hold 25 percent of Corp “B.” The combined ownership of the legal person and the natural persons result in common majority ownership (55 percent) of Corp “B” making the two entities combinable ; or
The business owns a majority interest in another entity which, itself, owns or owned a majority interest in a third entity currently operating or which operated in the last five years.

This is not an exhaustive list of relationships that can lead to combinability of loss experience; it is but a representation of the most common. These guidelines are subject to NCCI and/or individual state rating bureau interpretations. Agents, brokers and carriers should use these descriptions only for informational purposes as final determination rests in these other advisory bodies.

Natural and Legal Persons

Notice the repeated use of the natural and legal person(s) concept in the above paragraphs. Common majority interest can be created when a single “person” or a group of “persons” combine to hold a majority interest in multiple entities. It matters little whether the owners of other entities are natural persons, legal persons or a combination. Nor does it matter how they combine to create common majority interest between or among two or more entities.

Legal persons are generally created by the actions and desires of natural persons. Some legal persons are owned by one or only a few natural persons (a small business) while some are “owned” by many shareholders (traded on the stock exchanges). Natural and legal persons are defined as follows:
Natural person: A flesh and blood human being. In workers compensation the employer is a natural person(s) in sole proprietorships and partnerships. Managers and members of an LLC are viewed as natural persons in a majority of states making these persons the employers.
Legal person (a.k.a. juridical person): A legal fiction, a “person” created by statute and born with the filing of articles of incorporation. These legal persons are given the right to own property, sue and be sued. Corporations are legal persons and several states consider LLC’s a legal person.

“Majority Interest”

Majority interest is created when the same person or group of person(s) combine to own more than 50 percent of an entity. But majority interest can be created in many ways. NCCI lists the following:
• An entity or persons (as detailed above) owns the majority of the voting stock of another entity; or
• Both entities share a majority of the same owners (if there is no voting stock). Generally these are natural persons that own multiple entities.
• If neither of the above applies, majority interest is created if a majority of the board is common between two or among several entities.
• Participation of each general partner in the profits of the partnership (limited partners are excluded). Or
• When ownership interest is held by an entity as a fiduciary (excludes a debtor in possession, a trustee under an irrevocable trust or a franchisor).

Combinability Conclusion

Based on and applying the above common majority interest rules, the possibility exists for more than one combination of common related entities. Deciding which combination of entities applies is based on the following two rules (presented in order of importance):
1. Which combination involves the most entities?
2. If the above does not apply, the combination is based on the group that produces the largest estimated standard premium.

Regardless of how a group is created and combined, no entity’s experience will be used more than once.

Finally, although separate entities may be combinable for experience modification calculation; this does not exclude them from having separate workers’ compensation policies. Separate legal entities are entitled (and really required) to be written on separate workers’ compensation policies; combinability rules exist merely to assure that loss histories are not escaped by the creation of multiple legal entities or the closing of one and opening of a new one.


Workers’ compensation audit rules regarding remuneration inclusions and exclusions is a focus of the next two articles. Audit rules and the “ABCD’s” of workers’ compensation audits will be spotlighted.

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  • September 15, 2008 at 1:43 pm
    2ndamendmentmomma says:

    Thank You IJ !

  • December 8, 2008 at 2:24 pm
    joanne slavin says:

    Once again I find you when I google…Thank you for the articles. Joanne.

  • March 1, 2016 at 9:28 pm
    Mark says:

    Is it mandatory to combine entities under common ownership under one policy, or is it at the option of the insured.

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