Yes. Just because a business has closed doesn’t mean the terms of the insurance policy in place while the business was open has disappeared! The owners of the business still have a responsibility to uphold their part of the policy which lines out how an audit will be conducted and what information must be provided.
We are often asked questions about the audit process. “Why and how are audits conducted?” and “What happens if we don’t comply with the audit request?” are just a few of the more popular questions asked.
We’ve been over this many times in the past but it’s something always worth repeating. Workers compensation audits are the method in place used to determine the final premium on a policy. When a policyholder or employer buys a policy from an agent the premium quoted to them and on which they pay for the policy period is known as the “deposit premium.” It’s called that for a reason! Because at the end of the policy, after it’s expired, the insurance company will perform an audit. In simple terms that’s where the insurance company contacts the policyholder employer and requests actual payroll information for the time the policy was in force. They will then take that information, compare it with the original policy payroll information, which was a guess, and if the payroll was actually higher during the policy period they will recalculate the policy and send the policyholder employer a bill for the difference. It works backwards too. If too much was paid in on the deposit the insurance company will send money back to the policyholder.
OK…super simple right! So the audit process is really how the final premium of a workers compensation policy is determined. Audit is a part of the policy. It’s part of the policy conditions and is agreed to when the employer buys the policy.
So just because a business closes up it’s doors doesn’t mean the terms of the policy go away. Think about it. The deposit premium is based on a best guesstimate at the beginning of the policy of what the payroll will actually be over the policy period and the only way to find out what the actual payroll was is to conduct an audit.
If you close up your business, turn out your lights and lock your door why should you play along and allow the insurance company to look at your books? Why not tell them to just go away? First off, an insurance company never goes away! They’re like an elephant who keeps remarkable records and notes! And when you don’t respond to an audit request they have recourse. Typically they are allowed to apply some multiplier to the original deposit premium, send you a bill and if you don’t pay, send it to collections. Hey, you’re the one who agreed to this when you signed up for the policy!
Example: My deposit premium was $17,000. I closed up and didn’t allow the insurance company to perform the audit. They determine I’ve been uncooperative with the audit and apply a 25% factor to my premium which is now $21,250 and send me a bill for the difference over what I paid and the $21,250. Ouch! But that’s not the best part. Some states allow up to 300%! Now that’s one serious reason why you should cooperate with the audit process!
Example: Same scenario as above except in this example, my actual payroll was much less than that used to set the deposit premium. Say my actual payroll rated out at $13,000. I should receive $4,000 back from the insurance company. However if I turn my back as in the above example I’m looking at a $4,250 bill the insurance company will collect!
Lesson Learned: Comply with audit requests!
There are proper ways to file an audit dispute. When your audit is incorrect or mistakes have been made or codes have been reassigned at audit in error a proper audit dispute may need to be filed. Ask for help, don’t just turn your back. Contact a workers compensation consultant for help!
Hope this helps you out! Thanks!