Why Workers Compensation Audits Cause Problems – A tale of two perspectives

Audits cause problems. Maybe we should ask, why do workers compensation audits cause problems? Today let’s take a look at a story of differing perspectives that drive audit issues.

Once upon a time…

To begin, a workers compensation audit is part gathering empirical data and part subjective understanding and interpretation. What I mean is data, like payroll, overtime compensation, hours worked, number of employees, dollars paid to subcontractors, etc., are all gathered at audit time and placed on a worksheet that allows the auditor to compile into one place all the premium generating items for a policy period. Then comes the subjective or interpretive part which includes review of descriptions of work processes, how certain employees fit into the classification system and application of rules governing classification codes along with the standard exception classes of clerical, outside sales, drivers and automobile sales. The auditors job then is to efficiently gather the audit information and to be the eyes and ears of the insurance company.

From an insurance company perspective the audit process is where:

  • policy data is verified;
  • actual rating exposure (payroll aka remuneration) is gathered;
  • interviews are conducted with the policyholder to verify that work processes and “what they do” are accurate as to how the policy was originally presented to them for underwriting and acceptance;
  • classification codes used on the policy are reviewed and adjusted for accuracy;
  • additional premium generating items are discovered and applied;
  • adjustments are made to the policy either generating additional or return premium;

Pretty much everything that an insurance company can do during the audit process is guided by a convoluted set of complex rules. Whether it’s classification code, payroll application or subcontractor related, it’s usually somewhere in the interrpretation and application of the workers compensation rules that problems begin to develop.

From the policyholder or employer’s perspective the audit process is:

  • where some unknown person, the auditor, wants to come into their business, snoop around and go over all their accounting books;
  • intrusive and time consuming;
  • full of questions about their business that they may not want to answer;
  • shrouded in mystery with hidden unknown rules that when applied just increase the cost of the policy; 
  • controlled by a set of rules unavailable to the policyholder.

Did I say intrusive? That’s exactly how many employer policyholders look at the audit. A time consuming pain in the —-!

But even more confusing for the policyholder is the situation that develops when the insurance company changes classification or assigns payroll into other codes and then cites some rule, previously unknown to the policyholder, that on the surface allows them to do so. Changes an insurance company makes at audit usually cost the policyholder additional premium due. Changes at audit usually mean that someone didn’t do their job somewhere along the way when the policy was being set up!

But more important, while insurance company folks think that they fully explain to their policyholder why changes were made to a policy, in fact most of the time they just leave their policyholder scratching their head wondering what just happened.

And that’s how audits cause problems!

…Ok, ok it’s more complicated than that but I had to end the story somehow.

Thanks for reading!