There aren’t many pleasant parts of the insurance transaction. I measure it based on degrees of pain.
In my opinion, workers compensation audits are the most painful.
They’re frustrating for customers because there are unwelcome surprises. And anything that makes my clients unhappy makes me unhappy. I promise you this -- no one enjoys audit surprises. Yet they happen all the time.
With that in mind, allow me to share the 8 most painful audit surprises in hopes that you can avoid them.
The Wrong Workers Compensation Class Code is used for the Organization as a whole
I’ve seen this happen when an organization is rated as a low risk operation, and then at the end of the year the auditor determines the organization is a higher risk.
For example, for years, an after-school educational program as a school because it’s educational. After 5 years of no comments from the insurance company, an auditor determines that the organization is more properly considered under the Day Care classification because it’s an after-school program.
As a result, the premium jumps by 50% because every dollar of payroll is placed into a classification that is 50% more expensive.
In this situation, the customer usually asks “Why this year? Why now?”
There is no good answer. Sometimes you got a discount because it flew under the radar. The auditor is applauded because they identified “rate leakage”. This is insurance company code for “we didn’t charge enough money.”
Solution:
Make sure that you can justify the classification based on NCCI’s Scopes manual or the state classification.
1. Uninsured Subcontractors
At the end of the year, an organization submits their paperwork to the auditor. They’ve been collecting General Liability certificates, but not workers compensation. After reviewing this, the auditor adds the contracted receipts for every contractor without proof of workers compensation.
When the customer tries to collect proof of workers compensation from these contractors, they learn that some of them are not required by state law to carry workers compensation. As a result, the subcontractors did not carry workers compensation.
The customer is stuck with a massive workers compensation audit bill.
Solution:
Require all contractors to carry workers compensation, regardless of whether the state requires it.
2. The payroll on the policy was much lower than the actual payroll
The organization started the year expecting $200,000 in payroll, then had a tremendous year of growth and ended the year with $400,000 in payroll.
The premium doubles.
Solution:
When possible, use Pay-as-you-go products. Either that, or budget for increased costs in your premiums as your organization grows.
3. Excluded Remuneration is Identified – Stipends, Bonuses, Housing Allowances, Reduced Rent
Sober homes offer discounted rents to house leaders.
Vocational training programs offer stipends.
Churches offer housing allowance to their pastors.
None of this shows as wages in a financial statement, but they are considered compensation for workers compensation
Solution:
Include all remuneration as part of your projected payroll.
4. The auditor reclassifies individual employees into a higher classification
I had one client that had their payroll split between 3 different classifications:
8810 – Clerical. Cost approximately $.20 per $100 of payroll
8832 – Doctor’s Office. Cost approximately $.30 per $100 of payroll
8864 – Social Services. Cost approximately $2.40 per $100 of payroll
For years, employees who worked in an outpatient mental health program were classified under Clerical. One year, the auditor determined that since they interacted with clients, they should not be classified under the clerical classification. Since the individuals suffered from mental illness, the auditor determined that the payroll should be allocated in 8864, social services.
The net effect was an audit premium of $17,000.
Thankfully, the auditor was willing to consider the doctor's office classification instead. This reduced the audit to $2,000.
It was a big win. But it was almost a bad loss.
Solution:
Make sure you can justify the workers compensation classifications you use based on NCCI definitions.
5. Inadequate documentation
The auditor sends a list of paperwork. After keeping the audit open for months hoping the customer will comply, they send a final request and then close the file.
When they close the file, they slap the policy with a noncompliance fee and the premium increases 40%
Solution:
Know which documentation will be needed. Prepare for the audit.
6. The organization changed operations
Sometimes organizations add a new program in the middle of the year. Or they pivot with their operations. They determine that the in-home support services are no longer profitable and choose to focus on group home environments.
The net effect is similar to item number 1. The whole business is misclassified.
Solution:
Prepare for changed insurance costs when you change the direction of your operation
7. Owners payroll
The organization enters the year believe that the owner is excluded from the policy. They get to the audit and learn that the necessary paperwork was not submitted to be excluded. The organization now owes thousands of dollars.
Solution:
Make sure you have identified whether owners are included or excluded on the workers compensation policy at the beginning of the year.
Conclusion:
Workers Compensation audits create unpleasant surprises. Even great organizations will experience them. A little bit of prevention can save a lot of heartburn.
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