When it comes to the proper application of workers compensation classification codes mistakes are made by employers, insurance agents, auditors and insurance company underwriters. And these mistakes easily translate into incorrect premium paid for a policy. Misunderstanding about codes persist and when a problem like this shows up it usually accompanies a large additional premium bill for the employer.
We recently had a conversation with an employer who secured workers compensation coverage through a local insurance agent. His agent told him that if they kept their payroll records accurately they could split their employees payroll between two codes that were shown on the policy. The agent set the policy up with two codes that described separate job operations. One code carried about a $25/100 rate and the other about $10/100. The employer kept accurate payroll records by the hour per employee and divided them between the two codes as instructed. At audit, the insurance company told the employer he could not use both codes and that all payroll assigned to the lower rate class would be moved into the higher one. This caused about a $90,000 increase in premium for the employer!
Whose fault was it? The insurance agent, the insurance company? How about both?
The lower rated code description included a specific direction that indicated it was not to be assigned to a risk engaged in operations described by another class code unless operations under its class were conducted as a separate and distinct business and this was not the case. This is the section referred to by the insurance company when they disallowed the use of the lower rated code. The employer was very forthcoming about describing their operations to the insurance agent who was fully aware of the type of work the employer performed.
Why was the lower rated code used? That’s a good question! The consequences of using the wrong code on a policy can be substantial. The agent should have been aware of the conflict between these codes. When questioned about this the response was that he was unaware that the work was being done at the same job site. Making the the lower code inappropriate. Isn’t it his job to be aware and to guide his client?
You may ask, why the insurance company allowed this code to be used on the policy? Here’s where it gets kind of tricky! Shouldn’t some of the responsibility be laid at the insurance company’s door to make sure codes used on a policy are correct at the beginning of the policy period? They sure took advantage of the rules after the audit to charge the employer an additional $90,000! Shouldn’t the insurance company have some method in place to recognize conflicting codes when submitted on an application?
I guess I have more questions about this topic than answers! But I can tell you in this specific situation the employer was the innocent! He did what he was told to do by separating payroll. He was told the two codes could be applied. And he was blindsided at audit with a bill for $90,000!
Think about it, if the insurance company recognized the problem at audit why didn’t they recognize it when they issued the policy?
Be sure to contact our office if you’ve been presented with a large additional premium bill or are facing a conflict with classification codes on your policy. We may be able to help!
Hope in some way this helps!