It's not uncommon for an employer to go into shock upon receipt of an audit bill for a recently-expired Workers' Compensation insurance policy.  Sometimes the increases in premium that result from an audit are unexpectedly high.  Occasionally, they are so extreme as to threaten the financial viability of the company.

When that happens it may well be prudent to devote some time and effort to understanding the causes of the premium increase.  If your instinct is to dispute the amount sought by the insurance company on the audit, your initial outrage and frustration may not serve you well.  Insurance companies are accustomed to having policyholders get upset over large audit bills, and their response is often to dismiss your protests out of hand.  To get results, you will have to be specific in your complaints about what you feel are audit errors.

Figure Out What's Changed

To figure out if you have a basis for disputing the audit, you'll need a few documents: the original policy, the audit billing statement, and the audit workpapers.

First, examine how the estimated premium on the policy had been calculated.  Look at what classification codes were used, and how much payroll was assigned to each classification.  Then compare that to the audit billing statement.  If a more expensive classification is used on the audit that was not on the original policy, that may be a reversible error.

Look at the estimated payrolls used on the original policy and compare those to the payrolls used on the audit.  If payroll has increased on the audit (as it often does) use the audit workpapers to review how the auditor determined how much payroll to pick up.  Examine what documents were examined by the auditor, and if the auditor had to make any assumptions due to some documents not being available.

If overtime pay is significant in your operations, make sure the audit workpapers indicate that an adjustment has been made to remove the premium portion of overtime pay.  Almost all states allow the premium portion of overtime pay to be excluded, as long as payroll records allow the auditor to break it out.

The audit workpapers should also explain how the auditor allocated payroll among different classification codes.  That is, it should explain why the employers of certain departments were assigned to  particular classifications.  If the auditor has misunderstood the nature of the work done by some employees, it may have resulted in the wrong classification (and thus the wrong manual rate) being used to compute premiums for those workers.

Check what charges may have been made on the audit for uninsured subcontractors or independent contractors.  Insurers are paying increased attention to this, as in most states an uninsured subcontractor has the same rights as an employee of yours to file a claim under your policy.  If this is a cause of significant premium charges, you may well want to determine if you have (or can obtain) certificates of insurance from these subcontractors.

Also look closely at how any subcontractor payroll has been classified.

Also compare the experience modification factor on the policy to the modifier on the audit.  Most states prohibit increasing the modifier late in the policy term, so if the modifier is higher on the audit than on the policy, it may well be a reversible error.  The same applies to schedule credits and debits.

Once you've pinpointed what you feel are errors in the audit, communicate these in writing to the insurance company's audit department.  If you do not get what you feel is a satisfactory result, you may want to contact your state's department of insurance for assistance.  You may also want to appeal technical issues through the rating bureau appeal process in your state.

If the additional premium sought is large, and you cannot resolve the dispute using the above means, the insurance company may well threaten to file suit over the additional premium.  Keep in mind that this can be a double-edged sword for the insurer--that is, there are arguments that a policyholder can sometimes successfully advance in court that cannot be successfully used outside of the legal arena.

If your company finds itself embroiled in an audit dispute of such magnitude, Advanced Insurance Management consultants may well be of assistance in advising you as you consider your options.

Questions about Workers Comp audits, classifications, modifiers, or other technical questions?  Call AIM at 800-288-9256