We were recently contacted by an employer who had received a large audit bill from his insurance company. He had changed insurance brokers and insurance company at the last renewal of his policy. After going through the audit process he was presented with a bill for $78,000! The culprit? An incorrectly applied code on his policy.
It’s not just about reading code descriptions and trying to fit them into the operations of an employer. Rules governing the application and correction of codes must also be followed. In this case the governing code was road construction but the problem occurred when a code for traffic control was put on his policy. His employees were easily classified into these two codes because those on the road construction crew only performed construction duties and never performed traffic control and vice versa. Payrolls were separated and accurate records were kept. The only problem is that the traffic control code specifically indicated in its description that if duties were performed by a construction organization performing other duties at the same location then all payroll was to be assigned to the construction code and not the traffic control code. The code was on his policy so why couldn’t it be used?
Here’s a tip: Just because a code is listed on your policy doesn’t mean it will be allowed in combination with other codes.
At audit the insurance company discovered the payroll allocated to the traffic control employees was inappropriate so the payroll was moved into the higher rated construction code. Remember, both codes were on the original policy. So the question of whether this is a correction in classification or a reallocation of payroll exists. Special rules apply to changes or corrections of classification codes depending on when the error is discovered and whether the change increases or decreases premium.
Rules regarding changes or corrections in classification are also state specific. Not all rules apply the same for all states or types of operations!
Here’s the take away for NCCI states:
- Just because a code is listed on a policy doesn’t mean it’s correct or that it will apply;
- Changes in classification because the employer changes operations will normally be applied at the date the change in operations occurs.
- Corrections to classifications that reduce premium will be applied applied at the beginning of the policy regardless when discovered.
- Corrections to classifications that increase premium are applied either at the beginning of the policy, at the date a change in operations occurs or at the renewal of the policy all depending on when the correction is effective as outlined in the published table.
- There are exceptions that must be considered. The rules do not apply to all types of operations.
- It’s a red flag when payroll is moved from one class to another at audit time!
Getting to the bottom of a misinterpreted code on a policy at audit and how the correction was applied is important to the accuracy and integrity of the audit. Some changes are allowed to be applied when discovered, some can be applied retroactively to the effective date of the policy while others can only be applied at renewal.
Hope this helps out. Thanks!