Working your way through a workers comp audit problem can be like watching a slow motion comedy, you never know what’s coming next! Maybe it’s just the nature of audits or the players involved but when things go bad the snow ball effect seems to take over and one problem discovered leads to another and another and another. It’s not a perfect system, let’s take a look.
The way premium is determined for a workers comp policy is by no means a perfect system. Oh sure the concept where a rate per hundred by class code times the actual payroll at the end of the policy is probably the best way of generating an appropriate premium. Remember how it works? At the beginning of the policy the policyholder puts up a deposit premium based on a best guess of the codes and a projection of the actual payroll at the end of the policy all of which is then verified and adjusted by the audit process.
It’s the audit process that actually determines the final premium and for certain operations, like construction, just about everything can be changed on a policy at audit. Most problems originate with the intrepretation and application of rules governing the system.
Here’s a few thoughts on why audits go bad.
- Classification Codes. When the policy is originally set up the insurance agent has to determine and apply a classification code. Once the completed application for coverage has been sent to the insurance company an underwriter will review the way the policy was set up, ask additional questions and request the policy be issued. Sometimes the underwriter will ask for a correction of class codes before issuing the policy. But all of this is based on information provided from the employer about their work processes, the agent after inetrepreting what the employer does and finally the underwriter after reviewing what was submitted and possibly asking additional questions. Can you see how in this process a mistake can occur?
- Payroll or Remuneration. Remember the formula from above? Payroll times rate per hundred? Accurate projections of payroll or remuneration are critical to an accurate deposit premium. For some operations this is not a big deal because their payroll is stable from week to week, month to month and year to year. But for others, like contractors, payroll projections can be like a crap shoot! And accuracy can be only a pipe dream!
- Subcontractors. Yes…one of my favorite subjects! But also one of the most confusing issues for employers. I’ve written on this topic a great deal right here in this blog. So I’ll cut to the chase, if you use uninsured subcontractors whatever you pay them will be picked up and charged against you on your audit! Some exceptions, yes. But count on it!
- Poor Record Keeping. The audit process is all about gathering information. Most related to employee compensation, payments made to others for work and details about the business operation. Poorly organized records create communication problems for most auditors. Don’t just plop a box full of receipts and 1099’s down in front of an auditor! You’ll find that most audits go smoothly when the requested information is provided in an organized, orderly manner.
- Poor Communication. Did your agent tell you that most successful workers compensation programs are all about proper communication? Keep the lines open with your agent. Let them know if you’ve made any changes in your business operations. These changes could make an impact on your policy and the premium you pay at audit time!
- Preparation. Knowledge is king! Learn how to prepare for an audit. This link will take you to a page on our website with helpful information on how to prepare for an audit. Don’t be caught unaware of the audit process.
- Don’t Make Assumptions. We’ve seen countless employers get into trouble facing an adverse audit just because they made an assumption that was not correct. This goes back to the point about communication. Don’t assume! Ask questions!
As you can see there are many individual items that contribute to a workers compensation audit. Many are critical to the development of premium. From communication problems to the application of unknown rules, audits are full of places where they can go bad. And when they go bad they usually end up costing additional money!
Hope this helps you out! Thanks!
