The pricing and audit process of a workers compensation policy can be complicated. Mostly because of the many detailed factors that go into the process. Accuracy of information and understanding the process is key. So let’s look at a few of the more common problem areas that typically cause audit mistakes.
- Misinterpretation or Misapplication of a Classification Code: It depends on who you talk with but there are somewhere around 600-700 different workers compensation classification codes that are used to identify a business or sometimes individual operations performed at a business. The use of an improper code can lead to audit errors and mistakes. Sometimes codes are changed at audit or payroll is shifted into another higher rated code. Identification and use of proper codes remains high on the list of pricing and audit mistakes.
- Owner Changes Operations During the Policy Period: When a business owner changes operations, adds services or otherwise modifies what they do there is always the potential for a change in classification. This change may or may not impact on their audit but a good tip here is to be in contact with your insurance agent. Let them know what you’re doing! And be sure to document your conversations for future reference.
- Failure to Adjust Current Policy Payroll Exposures: When there has been an increase in payroll and the policy exposures have not been adjusted, the employer will have an increase in premium due at audit. As an employer it is important to notify your agent if you notice a significant increase in your payroll over last year. A mid term payroll adjustment to your policy will help spread your additional premium out over the remaining term of your policy and not be a lump sum burden at audit.
- Failure to File Correct Exemption Forms: If you state requires specific forms be filed in order for owner exclusions to apply, then make sure you file those forms!! For example if in your state LLC members may exclude themselves from coverage and choose to do so but the requirement is that of filing a proper form with either the insurance company of the state and if that form then make sure the form is completed. Failure to do so will mean the insurance company will pick up and include the owner/member payroll at audit time. Most insurance companies will not accept a retro active form!
- Failure to Keep Proper Payroll Records: If your company is allowed to separate payroll for individual employees you must keep proper payroll records that show payroll by employee by class by hour! Payroll separation can save an employer thousands of dollars in overpaid premium but the trade off is you must follow the rules!
- Use of Uninsured Subcontractors: A source of never ending workers comp audit mistakes! If you use subcontractors, use insured ones! Get valid certificates of insurance and keep your records up to date. If you must us an uninsured sub make sure you contact your insurance agent for guidance and remember, uninsured subcontractors will increase your workers compensation premium!
- Misinterpretation of Workers Compensation Rules: Another consistent source of audit and premium related problems. Whether it’s an agent unfamiliar with the rules, an employer trying to intreprut and apply a rule or an insurance company employee or auditor who improperly applies a rule, as complicated as they can be work comp rules seem like they were designed to be broken!
Mistakes happen on audits and premium calculations everyday. Most are just that, mistakes. Some are very costly and require special assistance to correct while others can be handled in house.
As a final thought, it really is accuracy of information that leads to accurate audits and premium. Of course there’s many more pitfalls of the audit and premium process but these few seem to cause more than their share of problems!
Hope this helps out!