Not telling your workers compensation insurance company when changes in your business operations occur can be extremely costly! Certain changes that you make in your business from one year to the next can have drastic effects on the cost of workers comp insurance and the premium you pay. Lets talk about a specific nightmare scenario.
A workers comp policy, while simple in concept, is wrought with many costly pitfalls just waiting for an unsuspecting employer to stumble into. Items other than payroll and correct classifications have a direct impact on premium and what you might think is a simple change in your business may cause you a great deal of grief at audit time. Here’s something to think about.
A Change in Ownership:
- A small roofing contractor, who for years operated his business as a sole proprietorship, was advised by his attorney to create and operate his business as a LLC. This was done to create a layer of liability protection for his personal assets, a very common situation. While performing the workers compensation audit the auditor discovered the change in ownership and told the business owner that in their state while sole proprietors are automatically excluded from workers compensation, LLC members are automatically included and must elect to be excluded by filing a specific form with the insurance carrier. See where this is going? The auditor picked up the owner payroll of approximately $40,000 (limited) and included it under the roofing class code, a rate of approximately $65/100. This generated additional premium of approximately $26,000! When approached for help the insurance carrier rejected their plea to retroactively accept the LLC Member rejection form and proceeded to collect the additional premium!
While the names and numbers have been changed to protect the innocent, this example actually happened! Let’s examine this for a minute;
- First we have a business owner who operated for years as a sole proprietor, knowingly excluded from workers comp coverage;
- The business owner did not want to be included;
- Only because of an administrative change was the owner, unknown to him at the time, brought under coverage;
- The insurance company experienced no change in risk or exposure; …well that’s not exactly true and that’s where the problem comes! You see, under their state statute, LLC Members are automatically included in coverage unless they elect out by submitting a form to the insurance company. When that form is not received, if the LLC Member had been injured, the insurance company would have had to pay for the injury. Remember what I’ve said before? If an insurance company would have to pay a claim, they are due a premium! It doesn’t matter if there was a claim or not, it only matters if they would have had to pay if one occurred!
- Why was the business owner not informed about the consequences of making this ownership change? He did not contact or ask his insurance agent if any changes would need to be made to his policy. Was he advised to contact his agent? No.
- The responsibility of knowing the effect this change would have was then left in the employers lap.
- Most small employers have no idea of the consequences these types of changes may have;
There you have it. An innocent act on the part of a business owner doing what he thought was the correct thing to do, forming a LLC to protect his families assets, creates a costly consequence. A mistake that may put this business owner out of business.
Lesson Learned: If you make any changes to your business operations be sure to contact your workers compensation insurance agent and discuss the consequences of the change. Don’t place your business in harms way!
If you have any questions about ownership changes or find yourself in the middle of a dispute with your insurance company about a similar situation contact our office! We may be able to help!
Hope this helps you out!