If a workers' compensation claim results in a $45,000 settlement and the contractor's experience modification rate increases from 1.0 to 1.3 due to this claim, what will be the additional annual premium cost if the base premium is $25,000?
Correct Answer
C) $7,500
New premium: $25,000 × 1.3 = $32,500. Original premium: $25,000 × 1.0 = $25,000. Additional cost: $32,500 - $25,000 = $7,500.
Why This Is the Correct Answer
Option C ($7,500) is correct. The experience modification rate (EMR) is applied as a multiplier to the base insurance premium. At EMR 1.0 (industry average), the premium is $25,000 × 1.0 = $25,000. After the claim raises the EMR to 1.3, the new premium is $25,000 × 1.3 = $32,500. The additional annual cost is $32,500 − $25,000 = $7,500. This represents the ongoing financial penalty for poor safety performance.
Why the Other Options Are Wrong
Option A: $20,000
Option A ($20,000) is incorrect. This figure cannot be derived from the given numbers using the correct EMR calculation. It may result from confusing the $45,000 settlement amount with the premium impact, or miscalculating the multiplier effect.
Option B: $32,500
Option B ($32,500) is incorrect. This is the new total annual premium after the EMR increase, not the additional cost. The question asks for the increase in cost, which requires subtracting the original premium from the new premium.
Option D: $12,500
Option D ($12,500) is incorrect. This figure might come from applying a 50% premium increase instead of the correct 30% increase. The EMR went from 1.0 to 1.3, which is a 30% increase (0.3 × $25,000 = $7,500), not a 50% increase.
Memory Technique
Think of EMR like a credit score multiplier for insurance. EMR 1.0 = average (you pay base rate). Above 1.0 = you pay more. The additional cost = base premium × (new EMR − old EMR). Here: $25,000 × (1.3 − 1.0) = $25,000 × 0.3 = $7,500. Always calculate the DELTA (change), not the total.
More California Questions
A contractor is bidding on a public works project in Los Angeles County with a contract value of $2,000,000. The prevailing wage determination shows carpenter wages at $45.50 per hour. What additional amount must be paid for health and welfare benefits?
A construction company has 15 employees working on a project. One employee suffers a work-related injury. Under California law, what is the primary difference between Cal/OSHA and federal OSHA jurisdiction?
A contractor employs 8 workers and pays total wages of $480,000 annually. If the Unemployment Insurance (UI) tax rate is 3.4% on the first $7,000 of each employee's wages, what is the total annual UI tax owed?
Under Cal/OSHA regulations, what is required when a construction site has a trench excavation deeper than 5 feet?
A public works project requires certified payroll records. The prevailing wage for an electrician is $52.75 per hour with $18.50 in fringe benefits. If an electrician works 8 hours, what is the total prevailing wage obligation?
On a prevailing wage project, a carpenter's regular rate is $28/hour, but the prevailing wage is $35/hour with $8/hour in benefits. What must the contractor pay if the carpenter already receives $6/hour in benefits?
A California contractor has quarterly payroll of $85,000. What is the State Disability Insurance (SDI) withholding amount if the current SDI rate is 0.9% and the wage base limit is $153,164 annually?
Under California law, which statement about business entity liability is CORRECT?
XYZ Contracting LLC has 8 employees in California. An employee is injured on the job and requires medical treatment costing $15,000. The company has no workers' compensation insurance. What is XYZ's potential liability?
A general contractor subcontracts electrical work to an LLC. The electrician works exclusively for this contractor, uses the contractor's materials, and follows the contractor's daily schedule. Under AB5, this relationship is likely:
People Also Study
Business & Financial Management
120 questions · 70% to pass
Contract Administration
60 questions · 70% to pass
Project Management
60 questions · 70% to pass
Related Study Resources
Previous Question
GHI Construction has a monthly payroll of $65,000. What is the employer's monthly contribution for State Disability Insurance if the employer SDI rate is 0.1%?
Next Question
A California contractor with 15 employees has a quarterly payroll of $180,000. What is the State Disability Insurance (SDI) contribution the employer must withhold from employees' wages if the current SDI rate is 0.9%?