If you have looked at the 2026 rate projections from the Kentucky Department of Insurance, you might be feeling optimistic. For the 20th straight year, loss costs in our state are trending downward. However, realizing these savings often depends entirely on correct Kentucky contractor classification; without it, the “average” rate rarely matches the bill that lands in your mailbox after an audit.
The disconnect often comes down to one thing: Kentucky contractor classification.
I’m Adam Sheridan with Reed Brothers Insurance Services Inc. I help contractors in Somerset and across the Commonwealth stop overpaying for their coverage. In this guide, I’m going to explain NCCI Rule 1-D-3—a regulatory mechanism that can either save you thousands or cost you a fortune, depending on how you keep your books.
Kentucky Contractor Classification and NCCI Rule 1-D-3
Most Kentucky carriers use the National Council on Compensation Insurance (NCCI) guidelines to determine your premiums. One of the most critical regulations for builders is Rule 1-D-3, also known as the “Interchange of Labor” rule.
In simple terms, this rule acknowledges that your employees might not do the same thing every day. A crew member might spend Monday framing a house (Class Code 5645) and Tuesday repairing a roof (Class Code 5551).
The rule states that you can split that employee’s payroll between the two different class codes, but only if you maintain separate, accurate records that show exactly how many hours were spent on each task.
If you don’t? The insurance auditor is federally mandated to assign 100% of that employee’s payroll to the highest-rated classification applicable to their work.
The Math: Why Kentucky Contractor Classification Matters
To show you why Kentucky contractor classification matters so much, let’s look at the actual numbers using 2026 rate data. The spread between low-risk and high-risk construction codes is massive.
Let’s assume you have an employee named Mike who earns $50,000 a year. Mike works for a paving company but occasionally helps with roofing repairs.
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90% of Mike’s time: Asphalt & Paving (Class Code 5606)
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10% of Mike’s time: Roofing (Class Code 5551)
Here is a look at the approximate base rates per $100 of payroll for 2026 :
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Asphalt & Paving (5606): ~$0.58
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Roofing (5551): ~$11.52
Scenario A: You Don’t Separate Payroll
Because Mike spent some time on the roof, and you didn’t log the specific hours, the auditor must apply the Roofing rate to his entire salary.
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$50,000 (Payroll) / 100 x $11.52 (Rate) = $5,760 Premium
Scenario B: You Use Proper Classification
You keep a daily time log showing Mike only spent $5,000 worth of his time on the roof, and $45,000 on paving.
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Paving Portion: $45,000 / 100 x $0.58 = $261
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Roofing Portion: $5,000 / 100 x $11.52 = $576
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Total Premium: $837
The Difference: By simply tracking the hours, you saved $4,923 on a single employee.
How to Document for the Auditor
The savings are real, but the documentation must be airtight. Auditors in Kentucky are strict about what counts as “proof.”
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Percentages Don’t Count: You cannot tell an auditor, “He spends about 20% of his time on the roof.” You need hard data.
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Dollar Amounts Don’t Count: You cannot estimate based on revenue.
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Time Cards Are King: You need a daily record—whether digital or on paper—where the employee logs their hours against specific job codes.
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Description of Duties: Ensure the timesheet describes the actual work (e.g., “Shingling roof” vs. “Pouring driveway”) rather than just “Job Site A.”
Next Steps
If you want to ensure you aren’t overpaying when your 2026 policy renews, follow this checklist immediately:
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Review Your Class Codes: Check your current policy declarations page. Are the codes listed actually the work you perform?
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Implement Daily Time Tracking: If you have employees shifting between trades (like framing, concrete, and roofing), start tracking hours by task today.
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Audit Your Subcontractors: Ensure every sub has provided a Certificate of Insurance (COI). If they haven’t, you will be charged for their payroll—likely at the highest rate.
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Check Your “Nature of the Work”: Kentucky is strict about who is an employee vs. an independent contractor. Don’t assume a 1099 form protects you from liability.
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Schedule a Pre-Audit Review: Don’t wait for the bill. Look at your numbers before the insurance company does.
Ready to get a quote? > Apply here or email me directly at asheridan@rbisomerset.com. Check out our other videos for your contracting business.
Disclaimer: This article provides general information and isn’t legal or insurance advice. Coverage availability, limits, and eligibility vary by insurer and are subject to underwriting. Regulations change; always verify requirements and consult your licensed agent.
