Estimated Policy Premium
Your workers' compensation premium is calculated by multiplying a rate times your payroll and dividing the result by 100. For example, suppose that your payroll is $500,000 and the rate is $0.10. Your premium is 500,000 X 0.1 / 100 or $500.
The premium you pay at the beginning of your policy period is a provisional amount. It is an estimate based on your projected payrolls for the coming year. After your policy has expired, your insurer conducts an audit to work out your actual payrolls for that year. Your insurer then adjusts your premium. If your actual payroll exceeds your estimated payroll, you may be billed an additional premium. If your actual payroll is less than your projected payroll, you may receive a return premium.
Purpose of Audit
Audits are performed to make sure that the premiums employers buy workers' compensation insurance accurately reflect their risks. Insurers check to make sure that employers are properly classified and that the payrolls used for rating purposes are accurate. If an employer's policy contains the wrong classifications or payrolls, the employer may be paying too much or too little, relative to other employers, for workers' compensation insurance.
Many states obligate insurers to audit all workers' compensation policies whose estimated annual premium exceeds a particular threshold, like $10,000. State insurance departments conduct periodic checks to form sure insurers are performing the specified audits.
Contractual Obligation
Most workers' compensation policies, including the quality NCCI form, contain a clause that addresses audits. In the NCCI form, this clause is found under Part Five, Premium. It states that the employer must allow the insurer to audit the policy anytime within three years after the policy has expired. The insurer has the proper to look at any records that relate to the policy. These might include accounting ledgers, tax returns, and payroll records.
Workers' compensation policies also contain a provision regarding inspections. In the NCCI form, this provision is found under Part Six, Conditions. It gives the insurer the right to inspect the employer's workplaces at any time. The purpose of such inspections is to assess the insurability of your business and to gather payroll information. Workers' compensation inspections aren't intended to be safety inspections.
An insurance policy is a legal contract. When you purchase workers' compensation coverage, you're contractually obligated to suits the audit and inspection provisions within the policy. If your insurer asks to go to your facility or request updated payroll information, you want to undergo its demands. Failure to do so may constitute a breach of contract. Your insurer may respond to your refusal by canceling your policy or refusing to renew it. This may adversely affect your experience modifier.
Types of Audits
There are several types of workers' compensation audits. The kinds of audits that are available can vary from state to state and insurer to insurer.
Mail Audit
The simplest type of audit. Mail audits could also be permitted for little employers that do not generate much premium. However, mail audits could also be unavailable to employers in certain occupations (such as roofing) no matter their size.
Preliminary Audit
Conducted when a policy is first written with a new insurer. Preliminary audits are generally performed on-site. Their purpose is to ensure that the proper classifications and payrolls are used on the policy.
Telephone Audit
Used by some insurers. The insurer may send you a form to complete and return to the insurer. When the insurer has received the information, it schedules a telephone call for you with an auditor to discuss the information you provided.
Field Audit
A physical audit performed at your premises. The purpose is to gather payroll and other information that the insurer will use to calculate your final premium.
Interim Audit
May be conducted if your business has changed in how, perhaps by starting a replacement operation. Interim audits are also used by large employers who wish to report their payroll monthly or quarterly rather than once a year. These audits are usually conducted by mail. A physical audit is performed at the top of the policy period.
Test Audit
May be conducted if your business has changed in how, perhaps by starting a replacement operation. Interim audits are also used by large employers who wish to report their payroll monthly or quarterly rather than once a year. These audits are usually conducted by mail. A physical audit is performed at the top of the policy period.
Fraud by an Employer
Complying with your insurer's request for information is not your only obligation as a policyholder. You must also provide accurate data. If you intentionally supply false information to your insurer, you could be prosecuted by your state's insurance department for insurance fraud. Here are examples of actions that could be considered fraudulent:
- Underreporting your payroll with the intent to reduce your premium
- Providing false job descriptions to an insurance auditor
- Providing phony tax returns or other financial reports
- Concealing the fact that you have hired subcontractors
- Providing falsified certificates of insurance for subcontractors
Once an audit has been completed, your insurer will send you a report. Ideally, the payrolls shown in the report will not differ substantially from the estimated payrolls listed on your policy. Unfortunately, this isn't always the case. If your payroll projections were too low, the audit may have generated an outsized additional premium. The audit report may additionally show changes to your classifications. If the auditor determined that your business was misclassified, they'll have added new class codes or removed existing ones.
Worker's Compensation Audit Disputes
Policyholders don't always agree with audit reports. A report might contain errors, like the incorrect experience modifier or incorrect payroll figures. Alternatively, it'd show classification changes with which you disagree.
If you are unhappy with the results of an audit, contact your insurer immediately. Most insurers provide instructions on the way to dispute an audit. These may be included in your policy documents. Be sure to follow the insurer's directions carefully. File your complaint in writing within the time period specified by the insurer. Describe the problem in detail. For instance, if you think that the auditor used the incorrect classification, explain your reasoning, and suggest an alternate. The insurer will review your complaint and choose whether a revision is warranted.
If an audit has generated a further premium but you've got disputed the audit results, your obligation to pay the extra premium should be suspended until the dispute is resolved. If the insurer doesn't address the problem to your satisfaction, you can appeal the insurer's decision to your state workers' compensation board.
The information contained in this article is not tax or legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to the law. For current tax or legal advice, please consult an accountant or an attorney.
