Not following proper cancellation procedures can lead to additional cost. Is it a fine? It may not really be a fine but don’t follow proper procedures and you may be faced with huge additional charges. Let’s talk about what happens when you let a workers comp policy lapse.
We often receive calls and email inquiries after an employer has let their policy lapse when they receive an unexpected bill from the insurance company demanding additional premium be paid. The two questions asked are “Why has this happened?” and “What can I do to get this problem fixed?”
The problem begins in that a workers compensation insurance policy is, unlike a property or auto policy, an auditable policy. That means that at the beginning of the policy you are quoted a premium and pay a deposit based on a projection of the actual rating payroll you expect to incur over the next twelve months, the policy period. (Be sure to check out our many posts and web pages about audits and the audit process.)
When a policy is not allowed to run its course the insurance company is left sitting there not knowing what the actual exposure has been. When a policy lapses because the employer just stops making installment payments and then ignores insurance company requests to complete an audit, a provision found within the insurance contract, you will find the insurance company will have a few choices as to how to proceed. You will also find that most states will allow an insurance company to impose some sort of estimated or uncooperative audit which may be as much as three (3) times the original deposit premium! This simply means that the insurance company rather than using the actual rating payroll figures, typically provided by the employer at audit, will take the original rating payroll figures used to set up the policy and apply the maximum multiplier allowed by their state thus developing what’s known as an estimated audit. Funny thing about this is that this process is supported by the state and fully subject to collection by the insurance company! It’s their protection when an employer refuses to fulfil their obligation under the insurance policy contract.
Here’s a not so quick example:
- An employer buys a workers comp policy and tells the agent the rating payroll for the 12 month policy period will be $100,000.
- The agent rates the policy using the $100,000 provided by the employer and comes up with a deposit premium of $9,000 and sets it up on monthly installments.
- The policy effective date is 1-1.
- The employer pays the 1-1, 2-1 and 3-1 installments but then stops paying and doesn’t notify the insurance company they want to cancel the policy.
- The insurance company doesn’t get the 4-1 payment and sends a cancellation notice that will be effective 5-1.
- The policy cancels 5-1 and the insurance company attempts to complete a cancellation audit and finds the employer uncooperative.
- The insurance company completes an estimated audit based on the original $100,000 rating payroll, prorated to the four months that coverage applied, used $25,000 in estimated rating payroll and applied the uncooperative audit penalty multiplier of 3 which developed a cancellation payroll of $75,000 which developed a cancellation earned premium of $6,750 for the 4 months coverage.
- The insurance company will recalculate what the employer had paid ($9,000/12 x 3 = $2,250) and subtract that from the cancellation billing of $6,750 – $2,250 to determine that the employer now owes them $4,500 due to the cancellation.
- The insurance company sends the employer a bill for $4,500.
- The employer doesn’t pay the bill.
- The insurance company turns the bill over to a collection agency who makes the employers life miserable until he pays the bill.
And yes, that really does happen. Maybe not exactly as I’ve lined out above, but usually pretty close.
There are other circumstances that may also apply when an employer lets their policy lapse without going through the proper cancellation procedure.
Here’s another recent example:
- This employer has had their policy with the same insurance company for 4 years. They have always renewed the policy and have always cooperated with the audit process.
- At their most recent renewal on 1-1 they decided to go to another insurance company because the rates were cheaper.
- Their original insurance company always billed renewal policies 30 days in advance and their policies were set up to automatically renew.
- The employer did not notify their original insurance company that they did not want to renew.
- The policy automatically renewed.
- The original insurance company did not receive payment and on 2-1 sent a cancellation notice which was ignored by the employer. Why should they pay attention? Remember they had moved their policy to another insurance company.
- The original policy cancelled on 3-1.
- The insurance company sent the employer a bill for the coverage incurred from 1-1 to 3-1.
- The employer did not pay the bill.
- The employer was turned over for collection.
Yes, this is a real life case. After several hours and incurring extra expense there was a favorable outcome in that the employer was able to prove there was replacement coverage without lapse and their original insurance company went back to the original 1-1 date and cancelled coverage. But what a hassle!!
So here’s a couple of words of wisdom:
- If you find you can’t make your insurance installment payments, contact your insurance agent and talk about your options. If you must cancel your policy sign a cancellation request and have your agent process it properly. DO NOT BURY YOUR HEAD IN SAND HOPING IT WILL GO AWAY! It won’t.
- When you need to cancel a policy ALWAYS SIGN A CANCELLATION REQUEST! It’s your protection.
- Work hard to comply with the insurance company and their request to conduct any type of final audit.
There you go. Improper cancellation of a workers compensation policy may not actually involve fines, but there can be penalties and sometimes a great deal of unnecessary additional cost involved when it’s done wrong!
Hope this helps you out and thanks for reading!