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The Workers Compensation Premium Audit:

    How Employers Should Prepare

survival tips and strategies to avoid overcharges

After a Workers Comp policy ends, it's routine for the insurance company to perform a premium audit (sometimes known as a payroll audit.)

 

This enables the insurer to determine actual payroll amounts that occurred during the policy period, which are almost always different than what had been originally estimated when the policy started.

 

It doesn't mean your company is being singled out for examination, or that the insurer suspects something wrong has been done--an audit is almost always done after a policy ends.

 

This means the insurance company may well bill you for a fair bit of additional money after the policy expires, citing rules that no one bothered to explain at the time you bought the original policy.

We call that a Shock Audit. It happens more often than folks realize. And we specialize in helping companies successfully dispute those Shock Audits.

But there are also things employers can do on their own to avoid being victimized by a premium audit that contains overcharges.


The fine print of the Workers Comp insurance policy gives the insurer the right to insist on such an audit, and it requires that the policyholder cooperate with scheduling and making available needed documents and information.

Sometimes there can be dramatic changes in premium based on audit results, and not  all of these changes are welcomed by insured employers.


 

   That's why we call them "Shock Audits". And if you ever end up on the receiving end of one, you'll know it. 

 

          And the insurance industry typically does a pretty poor  job of explaining what they've done on an audit that makes the premium so much higher that an employer is left sputtering "Wait--what???"

 

 

 

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Often these unwelcome changes are not truly correct and legitimate, per the rules that govern Workers' Compensation insurance. (AKA Workman's Comp or Workers Comp.)

Self-serving errors by insurance companies are common.

One solution is to try and prevent errors from creeping into audits in the first place.

 


Before The Audit

 

Before the premium auditor ever arrives, an employer should decide who will be the primary contact person for the auditor. This contact person should be someone who is very familiar with the work done by all departments and all employees, as well as someone familiar with the payroll records the auditor will be reviewing.

Review the original policy to see how the initial estimated premium was calculated. Look at the classification codes, rates, and payrolls used to compute your initial premiums--the auditor will be starting from this as well, but will not necessarily be limited to using only the classifications listed on the policy.


 

Also take a look at the information about your company that is readily available to the auditor, such as your company website and other online information.

Remember, it is likely the auditor will be looking at this information in advance of his or her visit to your offices. If there is any information there that could be misleading or is out of date regarding your operations or the nature of your work, not only should you be correcting it, you should also be prepared to clarify the changes with the auditor. 

You don't want incorrect, out-of-date, or misleading information to cause the auditor to make decisions that increase premiums improperly.


 

It's normally easier to address such issues early rather than after the audit is done, although it can be important to maintain a cordial and professional relationship with the auditor while the audit is being performed.

Incorrect or misleading information online can cause an auditor to apply an incorrect classification and rate to the audit, increasing premiums.


 

A premium auditor may well want to know information about the specific job duties performed by a certain department or by individual employees.

It is usually to an employer's advantage to provide accurate and detailed information to the auditor, because if the auditor has to make assumptions about the exposures he or she may well make worst-case assumptions that unnecessarily increase your premium.



Have your designated contact person review prior years' audit billing statements and prior auditor's workpapers (if your company has requested these in the past.) This will help your contact person understand the important issues that will likely come up during the upcoming audit.

Review your payroll documents to make sure that the records will allow the auditor to readily break out overtime pay and discount it back to straight time, as is allowed in most (but not all) states' Workers' Compensation rules.
Remember, if the auditor cannot readily break out the premium portion of overtime you will probably not get this significant discount.

The auditor cannot take the time to perform complex calculations to determine the premium portion of your company's overtime pay, so make sure your payroll records will allow the auditor to make the calculation without undue effort.


 

You may also need to refresh yourself with the basics of how Workers Comp premiums are calculated.

Disputing An Audit

 

If your company uses subcontractors or independent contractors, make sure you have on file certificates of insurance documenting that these 1099 people have their own Workers' Compensation insurance.

If you don't have certificates of insurance from them, but they did carry their own Workers' Compensation insurance, make sure to get certificates before the audit. Otherwise, your company may be charged for this exposure. If you can't get these Certificates of Insurance for all these 1099 payments, remember that most states nowadays have online "look up" services where you can look up a company and determine if they had Workers Comp coverage of their own for a specific past time period. This can be used in place of Certificates of Insurance to document that one of these subcontractors or independent contractors had their own coverage.


 

Check the rules in your state regarding opt-out provisions for sole proprietors or partners--in some states the independent contractor you use may have formally opted out of coverage requirements and you need to let the auditor know about this, to avoid being charged for the exposure.

Remember that most construction type companies can use more than one classification code for their operations, they can even divide the payroll of an individual employee between classifications.

But the payroll records must document the actual hours spent by such employees in each of the different workplace exposures. An estimate of time spent in each kind of exposure will not suffice.

If the payroll records do not document the hours spent in each kind of work, all the employee's payroll will go into the most expensive classification applicable. It may not feel fair, but that's how the rules are written.


 

When The Auditor Arrives

If at all possible, have a comfortable and well illuminated work area available for her or him.

A.I.M. recommends that, if at all possible, you do not have the insurance auditor review your records off-premises (at your accountant's office, for instance) because your account may well not have the detailed information about workplace exposures needed to qualify for some less-expensive classifications.

If the audit must be done off-premises, at least make sure a knowledgeable person from your company is available by phone for the auditor to talk to about such workplace questions.

Remember that the fine print of the policy gives the insurance auditor the right to demand virtually any document that might have a bearing on the premium computation. So sometimes an auditor may want to review tax filings and even tax returns, if the auditor thinks these documents may shed light on the actual exposures being audited.

Sometimes employers get indignant or confrontational when these kinds of additional documents are requested. This is almost always a mistake, as anything that makes an auditor feel suspicious about whether or not information is being withheld, will make the audit process more involved (and likely more painful in terms of time and effort on the part of the employer.)


 

How We Can Help You

The terms of the policy give the insurance company the right to inspect and review almost any document that could provide information relevant to determining premium.

And all too often, a perceived lack of cooperation on the part of the employer just makes the auditors suspicious and all the more determined to figure out what information is being hidden.

Our recommendation is that employers cooperate as fully and cheerfully as possible, and then review the auditor's workpapers carefully after the audit is completed, to identify any areas of possible dispute. But being uncooperative during the audit can often backfire on an employer, as auditors can and will fill in any blanks with "worst case scenario" type estimates, and then the onus is on the employer to prove that actual exposures are lower.

When the auditor is finished, make sure to ask to be sent a print out of the auditor's worksheets. This document is not normally provided unless specifically asked for, but if requested it will be provided without problem.

These worksheets will provide you with a roadmap for understanding how the audit was conducted, how the final payroll numbers were derived and what payroll was placed into which classification codes.

When requesting the printout of the auditor's worksheets, make sure to designate who at your company is to receive these documents, as they will contain sensitive payroll information that you may want to keep confidential.


After The Audit


When you receive the actual audit billing statement, review it carefully and compare it to the original policy. Check for the following

:

Experience Mod Changes on the audit
Normally, the experience modification factor should be no higher on the audit than on the original policy;

Classification Codes on the audit should not include any more expensive classifications that were not on the original policy, unless there has been some change in your company's operations since the policy began. The ability of the insurance company to add more expensive classifications at the time of the audit is limited in many states (although the rules for construction related work are more lenient on this point, generally allowing such classification changes even at the audit.)

The Schedule Credit or Debit should not have changed from the original policy. It your insurer has increased premiums by changing the schedule debit or credit, you may well have the basis for disputing the additional premiums.


If you are unfamiliar with Workers Compensation insurance, it can be a good idea to review the Basics of how Workers Comp insurance premiums are calculated. And you may want to study our Online Guide for more detailed information on elements of Workers Compensation premiums, such as classifications and experience modification factors. Also, remember that the rules that govern Workers Comp premium can vary from state to state.

And also insist on getting a copy of the audit workpapers. These detail how the auditor arrived at the payroll amounts used on the audit, and why the auditor assigned the classifications used.



 

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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.

Here is some additional information regarding Workers Compensation insurance audit rules.


If your insurer has initiated litigation over a disputed Workers Compensation insurance premium, you may wish to have your attorney contact us regarding serving as an expert witness in the matter.

 

Please email: AIM@cutcomp.com or call us at 800-288-9256 with questions on disputes, audits, classifications, experience modifiers, or other aspects of Workers Comp premiums and audits.

 

 

 

 

 

 

 

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"Thanks to your persistence and effort, we received a refund of over $36,000 from our insurance company."-Polar Tool


"Before we hired Advanced Insurance Management, we were facing almost $40,000 of workers compensation premiums for my company that supposedly had one employee.  I was facing the very real possibility of having to close my doors because of these bills.

Advanced Insurance Management was able to negate the premium that the insurance company was trying to apply. I would highly recommend Advanced Insurance Management to anyone that is involved in a dispute with their Workmans Compensation Insurance carrier.  They saved my business."--
WTLS Services


We Don't Sell Insurance

Advanced Insurance Management LLC is not an

insurance agency or brokerage. We're not looking to

 compete with or replace your current insurance agent.

 That means we can assist you, as consultants, without

making any change in who you buy your Workers Comp

insurance from. And we can work together with your

 agent, where appropriate, as we are not affiliated with

 any insurance agency or insurance company.

 

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Manufacturers.        Contractors.      

Transportation companies.     Staffing companies.     Hospitals. 

 

 

An NFL team.  Social Service Agencies.    

 

 

And even a company providing technicians at the National Synchrotron Light Source at Brookhaven National Laboratory.

 

 

 

 

 

In other words, just about every kind of employer you can think of, and some you might not have thought of.

 

 

 

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How We Can Help You

Over the years, we figure we've produced around $30,000,000--thirty million dollars--in Workers Compensation insurance premium reductions and refunds for clients. In the cases we review, we find significant reductions or refunds in one-third to one-half of them. You can find the answers to more Frequently Asked Questions here.

We've helped employers of all types and all sizes – from very small contractors and machine shops to Fortune 500 corporations. And we're experienced with the Workers' Compensation rules and regulations of every state that allows private insurance for Workers' Comp. So no matter your company's size, or where you're located, AIM may help you to reduce the cost of Workers' Compensation insurance now and in the future.

 

 

you can also listen to an audio interview about our work.

 

Consultants on Workers Comp Classification Codes, Experience Modifiers, Payroll Audits, & More



We've been helping employers since 1987, making Advanced Insurance Management one of the oldest and most experienced firms in the field of premium recovery.


 





"Advanced Insurance Management has been a tremendous help to Allied Welding, Inc., and has saved us money and generated a significant refund on our Workers' Compensation by finding an error in our classifications. We value their expertise."--
Allied Welding
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  • Advanced Insurance Management LLC
  • 3230 South Harlem Avenue,  Suite 203
  • Riverside, IL 60546
  • contact us:phone: 800-288-9256
  • e-mail:aim@cutcomp.com