Whose Job Is It To Teach An Employer About Workers Compensation Premium?

Every day we get a call from an employer who has just received a large workers compensation audit bill and doesn’t understand what happened! So I started thinking about this…who’s really responsible? Is it the employer, the insurance agent or the auditor? And what about the responsibilities an insurance company may have? Where should an employer turn to for answers about their policy? You probably know where I’m going with this but please read on…

I often write about how complicated some parts of the workers compensation premium generating or audit process appear. And it’s true. When you get down into the details of classification codes, experience modification rate calculations, claim reserving and handling or retro formula issues it can become confusing very fast. But in general, on the surface, where an employer may play, it’s much more straight ahead. Payroll times a rate equals premium!

So whose job is it to teach an employer that uninsured subcontractors, from a workers comp perspective, are usually no different than an employee or that if their state requires some specific form to be filed and if not done correctly could significantly increase the premium at audit? And just who is an employee anyway? Who tells an employer that when an audit is conducted the auditor will pickup the cost paid to uninsured subs and include that as ratable payroll. Who schools an employer on these kinds of things?

Sure there’re many employers out there looking for a way to scam the system. And those folks usually get what’s coming to them through the prosecuting attorneys office. Insurance fraud is not and should not be taken lightly! But there’s also many employers who unknowingly fall into one of many audit traps who because of some unknown rule to them all of a sudden find themselves faced with a large additional audit premium bill.

Workers compensation premium issues, just because of their very nature, create more adversarial relationships between an employer and their insurance company than any other line of insurance. Many times the battle lines are drawn and the outcome reached only after protracted litigation, an outcome costly for both sides. 

We certainly get involved when an employer feels they have been wronged by their insurance company. Sometimes they have and sometimes they have not. 

Here’s a classic example:

  • An employer, in business for 20 years, changes to a new work comp company and is in the construction industry and only has 2 real employees.
  • The policy is set up using the payroll of his 2 employees.
  • He has always (read 20 years) used “independent contractors,” and most are uninsured.
  • All his previous insurance carriers have only conducted a self audit, no physical audit. (His account is too small to justify the cost of a physical audit)
  • At the end of the policy year the new insurance company conducts a physical audit and discovers his use of “independent contractors.” They pick up the cost and add $200,000 in ratable payroll (uninsured subs are included in his state) to his audit causing the employer to receive a bill for $30,000!
  • The employer contacts his agent, the same one he’s had for years, and complains that the audit is wrong.
  • The audit is right. He has to pay.

This employer was not trying to get away with something but he honestly believed that independent contractors would not effect his policy at all. He was never informed about how it worked.

A few points to consider:

  •  Of course the insurance company sent him a letter, found somewhere in his policy packet, that warned him about the use of uninsured subs and provided him with some tips on how to prepare for an audit. 
  • He did received his policy in the mail but didn’t open it. 
  • His agent thought he only had 2 employees and was not aware of his use of “independent contractors.” Maybe he should have told the employer about uninsured subs anyway? Maybe he did.
  • The auditor did his job well.

This is really a bad situation for all involved, except the insurance company. It’s a situation that could have been avoided by simply taking a few extra minutes and learning.

A few tips:

  • If you’re an agent, educate your client about how the premium generating and audit process works.
  • If you’re an employer, take a minute and listen to your agent and document what they tell you.
  • If you’re an employer, open your policy and READ YOUR MAIL!

If you have a problem or questions about your workers compensation audit contact our office.

Hope this helps you out!