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!