A question we are asked with some frequency!
You would think that setting up a workers compensation policy would be somewhat simple. Unfortunately it’s the simple mistakes discovered at audit that can lead to additional cost after the end of the policy period. Let’s take a look at a few of the key components of pricing a workers comp policy.
- Classification Codes – Class codes are descriptions of the work process of a given business. Codes reflect the work hazards found within the business. It is the business that is classified, known as the governing classification code, not the work each employee performs. There are two exceptions to this; the standard exception classes which include clerical, outside sales and drivers and codes associated with the construction industry. Each code has it’s own rate per hundred of payroll which is used to generate the base premium.
- Payroll – Well, it’s really called remuneration, a term used in workers comp which includes payroll along with other items. Payroll projected over the policy period is used in calculating the policy premium.
- Experience Rating Factors – Businesses who qualify for experience rating will have assigned a specific factor or emod which reflects their claims experience as compared to the industry norm. This factor can have a significant impact on premiums paid and is a sensitive to classification because of the rate involved along with payroll paid and claims paid and reserved.
- Entity Ownership Inclusion or Exclusion – The inclusion or exclusion of owners is guided by the entity type. Corporate Officers, LLC Members, Sole Proprietors and Partners are subject to different rules.
Those are just a few of the components involved. So let’s get back to the question. Why did my insurance go up after audit?
- Did your payroll go up? Did you have more remuneration than was originally estimated on the policy when it was set up?
- Were the correct payrolls used?
- Were the correct class codes used when the policy was set up or were they changed at audit?
- Was overtime or other payroll items properly discounted or included in the audit?
- Were owners included or excluded and was this corrected at audit?
- Was the correct experience mod factor used or was there a mistake in the calculation and application of this factor on your policy?
- Were statutory employees picked up and included on your audit?
- Did you use uninsured subcontractors (Seems like I write about this all the time!) and were they picked up on your audit?
- Were rates changed at audit?
And of course there’s more!
So the answer? Many things can cause your premium to go up at audit! While common audit mistakes and errors do occur, you have to understand that many times the reason additional premium is due at audit is because of an increase in the exposure base or payroll. Simply you may have more payroll than was originally projected. And this is how an audited policy works.
Be sure to visit our website to learn more about workers compensation, classification codes, audits and other premium related issues!
Hope this helps you out! Thanks!