What is Combinability?

Combinability impacts the data used for the experience rating calculation, which the insurer uses to calculate premium.

The California Workers’ Compensation Experience Rating Plan—1995 (ERP), Section IV, Rule 2, states “separate entities shall be combined for experience rating purposes when the same person or combination of persons own a majority interest in each of the entities.”

An entity is defined as an individual, joint venture, partnership, limited liability partnership, corporation, limited liability company (LLC), unincorporated association or fiduciary operation (e.g., trust, receivership or estate of a deceased individual). 

Majority interest means an ownership interest greater than 50 percent.

How to Determine Combinability

1. Identify the legal nature of each entity (ERP, Section II, Rule 4, Entity).
2. Determine the ownership percentages based on the entity type described on the Determining Ownership page (ERP, Section II, Rule 8, Ownership).
3. Determine if the same person or combination of persons owns a majority interest in more than one entity.

Example #1
Sue’s Bakery LLC has two members, Sue Childs and Anne Childs. Anne’s Deli Inc. has two owners, Anne Childs and Robert Smith. Anne Childs owns 80 shares of the voting stock in Anne’s Deli Inc., and Robert Smith owns 20 shares. There are 100 total shares. Are these entities combinable?

Step 1: Determine Legal Entity Type
Sue’s Bakery LLC is a limited liability company. Anne’s Deli Inc. is a corporation.

Step 2: Determine Ownership Percentages
Ownership of an LLC is determined as though each member owns an equal share of the LLC; therefore, Sue Childs owns 50 percent and Anne Childs owns 50 percent of Sue’s Bakery.

Ownership of a corporation is determined by voting stock, if voting stock has been issued. The number of voting shares owned by each person determines ownership; therefore, Anne Childs owns 80 percent and Robert Smith owns 20 percent of Anne’s Deli Inc.

Step 3: Determine Common Ownership and Majority Interest

1. Anne Childs is the only person who has an ownership interest in both entities. 
2. Anne Childs has a majority ownership interest in Anne’s Deli, but she does not own a majority interest in Sue’s Bakery LLC.

Since Anne Childs does not own a majority interest in both Sue’s Bakery LLC and Anne’s Deli Inc., these two entities are not combinable for experience rating purposes. 

Example #2
White & Partners has three partners: Frank White, Patty White and John White. Baker & Cook JV has two joint venturers: Patty White and Frank White. Patty and Frank are married, and John is their son. Are these entities combinable?

Step 1: Determine Legal Entity Type
White & Partners is a partnership. Baker & Cook JV is a joint venture.

Step 2: Determine Ownership Percentages
Ownership of a partnership is determined as though each general partner owns an equal share. Since White & Partners is not a limited partnership, all partners are considered general partners. Therefore, Frank White owns 33.33 percent of White & Partners, Patty White owns 33.33 percent and John White owns 33.33 percent.

Ownership of a joint venture is determined as though each joint venturer owns an equal share of the joint venture. Therefore, Patty White owns 50 percent and Frank White owns 50 percent of Baker & Cook JV.

Step 3: Determine Common Ownership and Majority Interest

1. Frank White and Patty White together have an ownership interest in both entities. Together, Frank and Patty White own 66.66 percent of White & Partners and 100 percent of Baker & Cook JV.
2. Since Frank White and Patty White own a majority interest in White & Partners and Baker & Cook JV, these two entities are combinable for experience rating purposes. Note that as a single person, neither Frank White nor Patty While has a majority ownership interest in both entities.

Finally, although Frank and Patty White are married, and their son has an ownership interest in one of the entities, this information is not a factor in determining the combinability of these entities.

Can more than two entities be insured on the same policy?
Entities that share more than 50 percent common ownership can be insured on the same policy.

Can separate entities owned 100 percent by each spouse be combined?
The entities would only be combined if there is a majority common ownership. The marital status of the owners is not a factor in the determination of combinability. 

Note that the immediate family rule, ERP, Section II, Rule 5, applies when a change in ownership takes place.

Can a corporation be combined with an LLC?
A corporation may be combined with an LLC so long as there is a majority common ownership between the entities. 

• Ownership of an LLC is determined as though each member owns an equal share of the LLC. 
• Ownership of a corporation is determined by voting stock, if voting stock has been issued.

If a majority of the LLC’s members also owns a majority stake in the corporation, the entities are combinable for experience rating purposes. For example, an LLC with three members would be combinable with a corporation if two of the LLC members own a majority of the voting stock (or shares) of the corporation.

Can joint ventures be combined?
According to the ERP, “if an entity is a joint venture, ownership shall be determined as though each joint venturer owns an equal share of the joint venture”. In order for a joint venture to be combined with another joint venture, or any other entity, there must be a collective majority interest of ownership among all of the entities involved.

Can a trust be combined with another entity?
In most cases, a trust cannot be combined with other entities for experience rating purposes. However, if a trust is established by parents for the benefit of their minor children and the parents are the only trustees, then the trust is combinable with the parents’ other operations. Another example: If two or more trusts share identical trustees and beneficiaries, they are combinable with one another. For more information, refer to the ERP, Section IV, Rule 2.

Company A and Company B are not related or combinable. Why are they combined?
If you believe two or more entities should be combined or separated, please submit an ownership notification to the WCIRB via WCIRB Connect^®. 
More information on how to notify the WCIRB is on the WCIRB Connect^® Ownership Information Submission Tool page.

An insured owns two businesses. Can each business be rated separately?
If entities share majority common ownership, they must be combined for experience rating purposes, and both entities will be issued the same experience modification.