Workers Compensation Experience Rating and Combining Entities – Problems Discovered in Real World Acquisition and Mergers of Entities

When separate entities merge or are acquired, one of the least thought about issues during the heat of the acquisition is the effect a combination of these entities may have on the acquiring company’s workers compensation experience rating modification factor or EMR. I’d venture to say that the result of combining entities on the EMR may even come as a surprise to the new company after the deal is completed. And for those companies where maintaining contracts with current clients and acquiring new clients for their business may be dependent upon them presenting a good EMR (usually one that’s at or below 1.0) that is not the time to discover the potential problem created! In this blog we’ll uncover some of the problems associated with acquiring an entity with an out of control EMR and how that may affect the acquiring entity’s business from the stand point of premium cost and their ability to maintain and secure new clients.

Let’s get this out of the way. The Experience Modification Rating Factor, often times referred to as the EMR, is not a factor that, by itself, was ever meant to be used as some kind of safety indicator. Not doubt there’s many folks out there that would strongly disagree with me on this. That’s ok. It’s probably the only single independent factor available that may even come close to accomplishing this goal. But keep in mind, the EMR is a premium rating factor.

The two primary reasons for using Experience Rating, when compared to using only Manual Rating, are:

  • It tailors the cost prediction and final net premium cost to the individual insured.
  • It provides added incentives for loss reduction (I’m still not convinced on this one..I guess, maybe.)

In very simple terms, the purpose of an EMR is to tailor, or fine tune, the rating of an individual employer’s workers compensation policy to reflect that specific employers actual claim experience as incurred over a period of time known as the experience period (usually a look back period of 4 years with the most recent year thrown out.) Outside sources have tagged the EMR as being an indicator of an individual employer’s safe working conditions. In other words a reflection of how safe an employer may run their company. While the EMR in it’s development may include some of the points that an independent verification of an employers safe working would include you should keep in mind that it is in fact a premium rating factor and that’s how it was designed to be used.

It seems like we’ve written about this topic until the cows come home! In past blogs and articles we’ve pointed out why the EMR, by itself, should not be used in this capacity. We’ve gone into detail about how changes in EMR formulas (increased split points for one) have created increases in EMR’s without an employer having incurred a single change in their claim record and how single shock losses actually drive up an employer’s EMR. How claims that occur outside of normal business operations (undiscovered uninsured subcontractors) and even non-compensable claims falling within the experience considered may create a negative situation on an employer’s EMR calculation. Do these situations really reflect an employers safe or unsafe working record?

It remains that the desire by some organizations to seek a single number that can be used as an all inclusive safety factor often times overrules common sense. That it’s easier to hang your hat on that single number because in fact trying to determine how safe an individual employer operates their business can be extremely complicated with many individual factors that would need to be considered.

Case in point, an employer who for many years has operated their business without incurring a single workers compensation claim, has enjoyed a very favorable EMR of let’s say .90 all of a sudden incurs a single shock loss that now drives their EMR to 1.15. Does this mean that they do not operate a safe business? Does it mean that just because they had a .90 factor they operated a safe business? How can that be determined simply by looking at their EMR of 1.15 or even their .90?

In fact, it’s an employer’s loss history and their actual injury history and incurred incidents that may be a much better indicator. And in consideration of this, there are other sources of data, such as the OSHA 300 Log, that may be more helpful in determining a real pattern of safe or unsafe working conditions or lack in injury control found within their business. I’d venture to say that simply relying on the EMR, without examining an employer’s full loss and injury history, as developed over time, does not provide an indication of safe or unsafe working conditions!

Let’s go back and consider that employer who has a current EMR of .90. From all indication using the EMR, it’s a safe operation. What about the most recent claim activity? You know, that most recent year past that hasn’t yet shown up in the current EMR calculation. What if they’ve incurred a significant loss that carries a high reserve that will significantly impact the following years EMR? So .90 is acceptable this year and 1.15 is not acceptable next year?

I’m sure you’re tired of me going on and on about this, me too, so let’s move on.

Mergers and acquisitions create a special situation for any experience rated employer acquiring another entity. When it comes to experience rating and how the “experience” of the entity being acquired is treated you should know a few things.

  • “Experience” means loss or claim history – More specifically those losses or claims that fall within the experience period.
  • The goal of a rating bureau –  to make sure that past experience of the acquired entity is carried forward and reflected in the acquiring entities EMR calculations going forward.
  • Experience of the company being acquired will almost certainly be transferred to the acquiring company.
  • There is only one combination of circumstances (if you’re dealing with NCCI as the rating bureau) where the experience of an acquired company will be excluded from the acquiring entities EMR calculations. And all three of these must be met. They are:
    • There must be a material change such that where the complete ownership after the acquisition had no ownership before the acquisition or where new ownership interest in less than 1/3 before the acquisition or ½ after the acquisition…yes this is confusing! And…
    • There is a significant change in operations that results in a change of the governing classification. And…
    • The change in ownership results in a change in the process and hazards of the operation.

I hope you’re getting the idea that when you buy or acquire another company you just can’t willy nilly do away with the workers compensation claim history and its effect on the EMR calculation!

An employer is required, as indicated in the workers compensation insurance contract, to report changes in ownership to its insurance company within 90 days of the date of change. Ownership changes can be reported to the rating bureau using two method:

  1. By completing form ERM-14 – This form is, to say the least, a bit complicated for most employers who first lay eyes on it! If this is your chosen method of reporting an ownership change you may ask for help from your insurance agent!
  2. By providing a written narrative of the change or acquisition in detail on the letterhead of the insured and signed by the insured or an officer.

So let’s recap what we’ve learned and what we know:

  1. The EMR wasn’t really designed to be a safety indicator, it’s a premium modifier that’s designed to reflect an individual employers specific loss history in the rating formula . Argue all you want (and I still do), but in reality, it is used as one, and will continue to be used as one!
  2. If you buy another company you buy their workers compensation claim and loss history.
  3. All claim and loss history, of a company being acquired by another, will most certainly carry forward and be included in the EMR calculation.
  4. Resulting effects on an acquiring entity EMR can come as a surprise and be drastic. (Think of going from something like a .85 to a 1.25 just because your company acquired or merged with another.)

Lesson Learned:

If the company you work for has indicated they are considering an acquisition or merger with another company don’t forget to have a complete experience modification rate, EMR, review conducted based on the experience data of the parties involved before the acquisition has been completed.

If you need some help, just contact a workers compensation consultant!

Hope this helps you out and thanks for reading!

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Audit and Other Problems with Assigned Risk Plan (Pool) Workers Compensation Policies

Why do small employers always seem to have problems with workers compensation audits when the insurance company is the assigned risk plan? Does it have something to do with special rules that apply to these workers comp pool policies? Could it be that when an insurance agent sells one of these policies they forget to explain the consequences of the employer not complying with requests for audit? Could it be the employer forgets their roll and fails to live up to their responsibilities under the policy? Or could it be that a lot of small employers, who are sold an assigned risk (pool) policy, fall into an audit trap simply because they were required to have a policy in place in order to get work as a subcontractor? Nothing but questions!! So, let’s get some answers!

Small owner/operator employers are often faced with a very difficult decision when it comes to buying a workers compensation policy. That decision comes from their inability to qualify with a standard insurance company for their workers compensation policy. You see, most standard insurance carriers will only want to provide workers comp coverage to an employer who has been in business longer than three years, can establish a proven track record of continuous coverage by providing proof of coverage and provide evidence of a clean loss free history. In other words, a new in business employer or one who has not carried workers comp in the past, for whatever reason, or who has very low or no projected employee payroll will find it almost impossible to secure coverage through a standard insurance company. When these circumstances are present an employers only option will be to turn to their states assigned risk plan otherwise known as the workers compensation pool.

The assigned risk plan is the workers compensation market of last resort. It’s the place employers come to secure coverage when they cannot secure it through the standard insurance market place. Assigned risk plans were developed and are maintained by each individual non-monopolistic state. Be sure to go to our main website for more information on assigned risk plans.

There are a variety of reasons an employer may end up in the workers compensation pool. Those reasons include:

  • New in Business – It’s often difficult to find a standard insurance company that will want to provide coverage for an employer who is just opening up shop. However for those employers who fall into the low hazard categories for example, restaurants, shoe stores, small retail operations without delivery and some others they may find standard carriers that will want to give it a go. Contractors present a special problem. It’s especially hard for small contractors who are new in business to find available coverage other than through the assigned risk plan.
  • No Current Coverage – Perhaps the employer has been in business for some time but has never been required to provide coverage either because they did not meet some minimum number of employee requirement or perhaps because they have never before had employees in their business. Or perhaps it’s because the employer has not been able to keep up with his payments and the policy has lapsed or been cancelled for non-payment in the past. These situations are particularly difficult for a standard market insurance company to want to provide insurance coverage.
  • High Hazard Risk Exposure – Business operations and job functions within those operations run the full spectrum of potential injury hazards. High hazard operations may include multi story construction steel work, heavy construction operations like bridge and dam construction, road construction, blasting operations, demolition operations and work that involves small space confinement like work within manufacturing storage tanks, mining and coffer dam work. Operations like these carry a high potential for catastrophic injury. Most workers comp insurance carriers will stay away from these types of operations. It’s often found that assigned risk is the only available option for employers whose operations are found within the high hazard categories.
  • Claim Problems – Employers who have experienced high losses, poor claim situations, a large number of claims, deteriorating or out of control experience modification rating factors, EMR, often find themselves no longer acceptable to standard market insurance carriers. When shopping around for coverage they will often be presented with multiple carrier “declines to quote” situations leaving them with the assigned risk plan as their only option.
  • The Dreaded Ghost Policy – One of the most ridiculous situations found within the entire workers compensation parade of stupid things! Here’s an example. A hiring contractor wants a small owner/operator contractor to do a specific job for them. This small contractor works by himself and has no employees and has never been required to carry coverage on himself before. The hiring contractor requires the small contractor to have a workers comp policy in place before he can do the job. The small owner/operator contractor goes out and buys a “ghost policy” from his local insurance agent. The owner/operator contractor excludes himself from the policy hence the term “ghost policy.” Since there are no employees the potential for coverage being triggered is almost nil. However this policy is a real workers compensation policy. It will provide coverage for any employees the owner/operator contractor hires. I’d venture to say that 100% of the known ghost policy situations out there are written in the assigned risk plan.

Ok, so we’ve established that the assigned risk plan exists to fill a need. A need that other standard workers compensation insurance carriers do not want and will not take on from a primary coverage stand point. That it is the market of last resort. (That means, for whatever reason, no other insurance company will provide coverage for the employer. Get it, the market of last resort.)

Now let’s talk about what goes wrong with these policies especially when it comes audit time.

For larger employers, those who find themselves in the pool for whatever reason, the process of securing coverage, maintaining the policy from using correct class codes to proper assignment of rating remuneration or payroll, usually doesn’t cause them the same grief experienced by the smaller employer. Mostly because they have other professional folks, experienced workers comp insurance agents, in house risk management and accountants looking out after their interests. And sure, even with those folks, large employers are susceptible to the same kind of problems dealing with the pool. But for the small employer, who may not have the team of professionals backing them up, it becomes a different experience.

There are some common trends here. Let’s focus on the new in business employer for a minute. Let’s say our business owner has just started his business and found that he only qualified to secure coverage through the assigned risk plan in the state where he operates his business. He goes to his local insurance agent who provides the business owner with homeowners and personal auto insurance. The agent also sells business insurance in the form of small BOP type policies, nothing really complicate. But this is ok because the business owners business fits into the guides for the BOP policy. Maybe the agent is a direct writer, an employee of the insurance company he represents. When it comes to securing the workers comp part of the insurance package the agent finds his company will only provide that coverage if the business owner has current insurance in place. Since he does not, the agent turns to his states assigned risk plan to secure the policy. The agent places the coverage and the small business owner walks away with a policy.

This is the first place where things start to go wrong. Agents who are unfamiliar with using the assigned risk plan may assume that the business owner understands the pricing mechanism in place for these policies. To avoid future problems, at the point of sale, the agent should as thoroughly as possible educate the employer on how the policy is calculated and what factors are used in determining the final premium through audit. Keep in mind the business owner may only know that he needs a policy.

What about the small employer, owner/operator type of contractor who has no employees but is required to secure a work comp policy in order to get a job from another hiring contractor? So this guy or gal has to go out there and buy a policy, some folks call these ghost policies, where the owner is excluded from coverage and they have no employees and hire no subcontractors to help with the work. They are forced to pay a minimum premium, lets say $1100, just to get the work. Here’s a question you should be asking. Why in the world would anybody have to do this?!? And here’s where I’ll answer if the hiring contractor has a work comp policy in place his insurance company will more than likely have to charge him a premium for the small contractor he hired unless that small contractor has a policy. And you should ask, but the small contractor was excluded from the policy. And I’d say yep, welcome to the wild world of workers compensation!

Potential pitfalls facing the assigned risk employer policyholder:

  • Incorrect Classification Codes
  • Inaccurate Rating Payroll Projections
  • Unknown Effects of Using Subcontractors
  • Aggressive Audit Procedure

Looking at that short list you’ll probably realize there’s really nothing new here. That’s actually true! I’ve written about these items many, many times in the past. In fact they are probably the key workers comp problems facing all employers. But for the small employer in the assigned risk plan these common pitfalls may await!

It’s at audit time that things often go wrong. You see, once the original policy is put in place, there’s usually no changes to the policy until it’s time to complete the audit. Some insurance carriers will perform what they call a “pre-inspection.” This is where they will send someone out to meet with the new employer and review their specific situation. It’s where they will try, at the beginning of the policy, to make sure things are right. Oh, don’t think this is being done to help the employer! Insurance carriers in fact have rules they have to go by and a few of those rules involve the timing they have to make corrections to a policy. I suspect that’s got more to do with it than trying to be of help to the small employer.

Let’s go over a few things that can happen to the small employer/policyholder at an assigned risk plan audit. Again, nothing really new here except maybe one thing, the ANC. Here’s a list:

  • Reclassification of Employees – Wrong class codes are used on the original policy. When this happens, given certain circumstances, the insurance company may be allowed to correct those class codes at audit time. Of course, this may work out in favor of the employer because the original codes may have carried higher rates than those that should have been used. For whatever reason, and I know most of them, it usually doesn’t happen that way. But rather the codes used on the policy generally carry a lower rate meaning at audit, the shift into higher rated codes will generate a much higher additional premium for the employer.
  • Reassignment of Rating Payroll – Misclassified worker payroll will often be moved from a lower rated code into a higher rated code. Unlike the above example where an entirely new class code is added to the policy, a reassignment of payroll is simply moving certain employees from one code to another code that exists on the policy. Rules for reassignment of payroll are much less restrictive that those of adding new codes.
  • Audit Non-compliance Charge – I’ve recently written in this blog about the Audit Non-compliance Charge also known as the ANC and how this is a charge levied against a policyholder when they do not comply with a request from the insurance company to complete the audit phase of the policy requirements. And for those in the pool, it can become a real problem. You see, when that small contractor buys one of these policies because they needed it to get a job, they often time believe that when the pay their premium, that’s all there is to it! But that’s only the first half! They must still complete the audit phase of the policy. And if they don’t complete that phase, it’s the ANC that creates the penalty. The ANC charge can be as much as 300% (in most states it’s 200%) of the original deposit premium. Lets go back to our small contractor who paid $1100 in premium. The ANC for that policy could be as much as an additional $3300! And to answer your question, yes the insurance can levy this kind of charge and yes they can get a judgment against that small contractor! And yes they can turn that over to a collection company. Now in reality the insurance company just wants the policyholder to comply with the audit process and most of the time when they do comply, the ANC will be backed off. But that’s certainly a way of bringing attention to the matter!

So let’s wrap things up. We’ve discussed how the assigned risk plan, or pool, can create some pretty big problems for a small employer. We’ve talked about how the assigned risk plan is not really where you want to have your workers comp policy placed. But we’ve also learned that given certain circumstances there may be no other alternatives for securing workers comp coverage. The assigned risk plan certainly plays an important part within the entire workers compensation mechanism. And as a take away, just like any other workers compensation policy, educate yourself as to how the policy works, how your workers should be classed and be prepared to meet your obligations under the audit conditions of the policy!

Hope this has been of some help to you! And, thanks for reading!

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How can I keep my workers compensation premium from going up?

For such a simple insurance product workers compensation can cause so many problems! And one of those persistent problems for many employers is the seemingly never ending increase in premium some of them get to face every day. Truth of the matter is that in today’s workers compensation environment we are seeing overall reductions in cost on a very broad scale. But that hasn’t slowed the questions we receive from employers about how to keep their workers compensation premiums from going up. So in this blog we’re going to explore the who, what, when, where and why workers compensation premiums increase, even though we may be in an environment of overall rate reductions.

Hopefully you’ll gain a better understanding of the driving forces at work that lead to increased workers compensation premiums and will be better prepared to handle them when they occur.

Contrary to what seems popular belief, workers compensation is a very dynamic insurance product. It’s a product that’s influenced by many diverse factors. Some of those factors are very broad and may impact on a state level. Others are very specific and are directly related to an individual employer’s specific situation. Regardless the source, they all, in some way or other, contributes to increased costs that are passed along for the employer to shoulder.

Some of the very broad factors include:

Individual State Legal Environments – The regulatory environment, from a workers comp perspective, is always in flux. Changes made at this level may certainly have an impact on the costs an employer incurs. 2017 is lining up to be no different. We expect to see a number of states proposing a variety of changes to their individual work comp systems that may have a positive or negative impact on the system. Of course costs an employer may incur may well be tied to the changes state legislatures enact.

Cost of Medical Services – No doubt we’ve gained enormous positive strides in our society through advances in medical procedures, development of new drugs and disease/injury treatment. The reality is that those advancements come at increased financial costs. Better treatment for injured workers is a positive advancement however those increased medical costs must be addressed in the worker’s compensation system. Increased claim costs have a direct impact on the financial outcome of any insurance company and will ultimately lead to increased premiums.  However we must consider that as medical advancements and improvements continue to be made we may see resulting offsets in lower lost time accidents ultimately reducing indemnity costs associated with work comp claims.

Insurance Company Competition and Market Share – Never underestimate the competitive nature of an insurance carrier! Competition and market share often drive premiums for carriers who find themselves in an aggressive mood. When an insurance company wants to grow their market share not much will get in their way. Sometimes this is good for an employer and sometimes not! What you typically find is that the long tail costs associated with workers comp claims (this is where it can sometimes take years for a single claim to catch up and mature in claim value) will catch up those carriers who may be artificially under priced with the notion of securing market share.

State Mandated Benefit Revisions – Keeping up with the times. Individual states must monitor and adjust injured worker benefits to be able to provide a reasonable level of acceptable care for their workers. While not all changes in state benefit levels may result in increased workers comp costs, those that do must be addressed within the workers compensation system.

Insurance Company Profitability and Performance on a National Basis – While 2015 ended up being one of the best national performing years for insurance carriers since 2006 by coming in with an overall combined ratio of 94% some individual carriers may not have fared as well. Those carriers who underperformed as compared with others may need to reevaluate their pricing position in the workers comp arena. This reevaluation may result in their individual companies having to tighten the acceptability of new insurance clients into their programs. Premium costs their employer clients pay may certainly be tied to their overall financial performance.

Some of the individual employer factors include:

Size of the Business in Question – It’s about options. Large employers with many employees and extensive financial resources have options when it comes to meeting their workers compensation obligation to their employees. Contrary to this, small employers with few employees certainly have limited options. Whether an employer’s business is large or small will have a great deal to do with their individual ability to control their workers compensation premium costs.

Policy Structure and Coverage Options – For the large employer,  policy structure may lead to options in securing coverage and coverage design. Those options may include the use of: Self Insured Programs, Captives, Large Deductible Programs and Retrospective Rating Plans. All of these focus, in some manner or other, on the financial management of the individual employer’s workers compensation program. All of these require a high level of financial expertise not available to the average small employer. For the small employer options are much more limited. Small employers may be able to take advantage of some state offered small deductible plans but for the most part are limited to guaranteed cost programs. And when limited to guaranteed cost plans you’ll find they are much more susceptible to the insurance carriers

Individual Employer Experience Modification Rate (EMR), Claim and Safety Management – Not all employers are experience rated. In fact there’s a threshold established by individual states for an employer to become eligible for experience rating. That threshold usually runs somewhere between $2,500 and $10,000 in premium. Once an employer becomes eligible for an EMR all claims they incur will play a big part in the pricing of their workers compensation policy. This comes in the form of a rating factor that’s applied to their premium formula. That factor could range from .70 or lower to 1.80 or even higher all depending on the actual claims that individual employer has incurred. Claim and safety management and an employer’s ability to incorporate the techniques found within these categories into their workers comp management practices ultimately lead to better EMR management. Those small employers not experience rated face another totally different situation than those who qualify for an EMR. For small employers, those looking at small annual premiums that would be below the EMR qualification level, their individual challenges have more to do with being able to secure coverage and keep coverage than worrying about how much it costs! Small employers are almost totally dependent upon the kindness of the insurance company machine. Think about it. An employer with a $2500 premium has an employee who suffers a serious back injury that carries a cost of $50,000. How can that insurance company ever recover the cost of that one single claim? They can’t. And that’s what puts those small employers in peril. That’s why so many small employers find themselves with limited or no coverage choices but the assigned risk (pool) plan available in their state.

Employer Classification and Hazard Exposure – Of course the premium an employer pays will have a great deal to do with the level of hazard found within their operations.  In real simple terms, workers compensation rates are statistically developed by taking loss costs, as published by individual rating bureaus like NCCI, by classification code and adding the insurance company load factor (insurance carrier profit and expenses.) This is why in competitive states you’ll find different rates between insurance carriers for the same class code. Class codes that represent high hazard exposures will naturally carry a much higher rate than those representing lesser hazards. It’s easy to understand. Just think about the high steel iron worker building sky scrapers as compared to an office worker. It’s easy to see the big hazard exposure difference between those two occupations! So employer classification and hazard exposure can have a great deal to do with the premium an employer pays.

Here’s a few tips any employer can use to help control their workers comp premium:

Implement a Strong Safety Program – You don’t have to be a giant corporation with many employees to have an effective, workable safety program. The goal is simple. Zero claims.

Eliminate Claims – We know how workers compensation claims can affect an employer. As I mentioned above the goal for any employer should be zero claims! If your company has experience deteriorating experience modification rates, EMR, you need to take a close look at how your claims are being handled. This may involve re-working your entire attitude towards claims! Claims can ruin an employer. They require diligent effort, proper management and employer involvement.

Choose the Best Insurance Program for Your Business – Consider coverage options like deductible plans, dividend plans and other methods of meeting your statutory obligation like self insurance, use of captives and retrospective rating plans.

Work with a Knowledgeable Workers Compensation Insurance Agent – This may be the best option for small employers! Agents will monitor the market place, are good at shopping for appropriate coverage and understand the behind the scenes issues that drive access and availability of coverage for the employer.

Use Outside Resources to Verify Rating Elements on Your Policy – We’ve already mentioned classification codes and the importance of them being correct on your policy. Changes in business operations may create necessary changes in your classification. Changes or modification may result in additional codes that may be more descriptive of the new operations. These codes may carry lower or higher rates just depending on the type of change. It’s always a good idea to have an independent consultant take a look at your classification codes to verify accuracy.

Monitor Changes in Your Rating Payroll – Increases in rating payroll will result in a direct increase in the cost of your workers compensation policy. Rating payroll is what’s used as the exposure base in calculating your premium. Classification codes are presented with a rate per $100 of rating payroll.

Verify Your Audit – Audits should represent your operations at the time of the audit. Be careful with this one. Many employers misunderstand the importance that audits play in the entire pricing mechanism. Audits should always be completed and if you need help reach out to an independent audit specialist for assistance. If you have questions about the accuracy of a completed audit check in with an independent worker’s comp consultant.

Keep in mind that those items found in the broad factors category, while they may have an extreme impact on overall pricing, actually have very little to do with an individual employer’s specific situation. Think of them as an overall influencer but for the most part remain out of the individual employers control. While on the other hand the individual employer factors are the ones an employer can maintain some control over.

There you go a few reasons why your workers compensation insurance premiums go up. By far not all of the reasons! However by now you should now have a good sense of the complexity of this so called “simple insurance product!”

I hope in some way this post has been helpful to you and thanks for reading!

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Documents and records required to complete a workers compensation audit.

If you’ve ever been through a worker’s compensation audit you will certainly recall the list of documents the auditor asked you to compile and make available for their review. It’s not optional! The requirement to provide documents and records for review is a part of the workers compensation policy. In this blog we’ll explore the type of records you need to be ready to provide for review and answer a few questions that are common for this topic.

The purpose of document and record review, as conducted in a workers compensation audit, are to determine premium generating exposure for the workers compensation policy being audited.

Here’s a listing of the type of records you will be asked to provide with a little detail to consider about each:

Journals – A common definition of this term is a record of financial transactions shown in date order by transaction. You’ll find journals hasten back to a time when accounting was accomplished in a manual manner. Journals would be broken down into individual topics that would include Sales Journals where sales transactions would be recorded; Purchase Journals where individual purchases made by the company would be recorded; Cash Receipts and Cash Disbursement Journals would be used to track cash transactions. Accounting transactions like these would be manually written in one of these types of journals prior to being posted to accounts found in the general ledger.

Ledgers – Ledgers are made up of a series of accounts. A typical general ledger may include asset accounts; liability accounts; equity, revenue and expense accounts. Financial reports, such as income statements, trial balance and balance sheets, will be generated from the ledger level of summarized journal information. While journals provide transaction details, ledgers provide summarized categories of that information. Again, you will typically find ledgers used in manual accounting methods.

Contracts – Certain contracts may be reviewed as they may include ratable policy exposure.

Registers – Think of journals. Registers are normally a grouping of similar transaction types as used in accounting. A check register may also be considered a cash disbursement journal. Get the idea? It’s a listing of transactions. A listing of cash being sent out.

Payroll Records – This is a big one! Of course payroll records must be reviewed. Payroll records may be in the form of a register or journal listing each employee and compensation disbursed to that employee. These records will typically include the hours worked, overtime hours, rate of pay per hour, rate of pay for overtime or premium time paid. These records may include bonus paid and or other type of compensation for work provided to the employee. Payroll records may be subdivided into categories by location, state, job function and any other additional tracking information that the employer may find useful from a management function.

Disbursement Records – These will typically fall under some form of cash disbursement journal. These records will often include payments made to sub contractors, independent contractors and others whose relationship with the employer may create a ratable exposure for the workers compensation insurance company.

Computer Programs – Of course most small business accounting functions are today performed by use of a computer program. When you take a look, you’ll find that wording found in the workers compensation policy language will include computer programs, used to store and retrieve accounting information, as part of the required accounting records needed to complete the audit.

Tax Documents – Tax documents are used to verify that the information being provided for use in an audit, is in fact, accurate. You may ask why tax documents? Think about it…it’s one thing to lie to someone conducting a workers comp audit but entirely something else to lie to the government! Actually, to provide false documents or to lie about the information you are providing to a workers comp auditor may constitute the act of committing insurance fraud. Sure mistakes do happen, but when those “mistakes” are made on purpose, with the intent to secure a lower premium, they cross over into the realm of fraud. What tax documents may you be asked to provide:

  • 941 Form – This is a federal tax form prepared to report your employee payroll along with taxes withheld for those employees to the government.
  • State Wage and Contribution Form – This is a report used to report employee payroll along with state taxes withheld to the state in question.
  • Schedule C – For an individual or sole proprietor, an auditor may ask to review your IRS Schedule C. This is a form is used to report a profit or loss from a business if you operate as an individual or sole proprietor. On the form you will find a section where income is reported and a section where expenses are reported. Under the expense section you’ll find items like commissions paid, contract labor and wages paid. This is just another place where an auditor looks to identify and verify workers compensation ratable exposure.

Certificates of Insurance – We can’t talk about this topic without mentioning one of the most important documents that an employer may be asked to provide. Certificates of insurance are used to show that another company, one who the employer conducted business with, in fact had a workers compensation policy in place. This is especially important for those employers in the construction trades. Most uninsured subcontractors will be considered statutory employees of the hiring employer. Translated into english, this means the auditor conducting the hiring contractor’s workers comp audit will pick up any amount paid to the uninsured subcontractor and include that as ratable exposure on the hiring employers audit.  Be careful here because these situations can often lead to unexpected high addition premium audits.  A valid certificate of insurance will show the auditor that the subcontractor did have workers compensation coverage in place so the hiring employer will then not charged.  Be sure to check out the special certificate of insurance section found on our website for more detail information about this proof of coverage documents.

Keep in mind that when an auditor asks you to provide these documents they are doing so to discover and verify ratable exposure used to determine the ultimate premium you will pay for your workers compensation policy. Don’t forget that ratable exposure means much more than payroll. The actual term is remuneration. Payroll is only a part of the more general remuneration category.

We often encounter employers who have had a bad experience working with a workers comp auditor. Of course the best survival plan of having an audit conducted on your business is to be prepared, be aware and walk away with no surprises!

I hope this post has been helpful. And thanks for reading!

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