Don't overpay: Five ways the pandemic continues to complicate premium audits

The complexity of the premium audit existed long before COVID-19, however, the pandemic made things much worse. Pre-pandemic 75 percent or more of premium audits were incorrect; add to this the ever-changing rules related to the pandemic and there is a very good chance that the audit will be incorrect and you will be overcharged. Most of the errors will result from misunderstanding the rules or inaccurate records. Here are five ways the pandemic complicates premium audits:

1. Virtual audits

   While electronic audits existed before the pandemic, they were mostly for smaller, uncomplicated businesses. Last year, the hybrid premium audit became the norm. The insurance company sends a letter that requests materials that will need to be copied and mailed or scanned and emailed to the premium auditor. This is often followed by a phone or virtual meeting over a video platform.

   The problem is sometimes the audit forms don't ask the right questions or are confusing. It's recommended that you review this letter with your agent and prepare an audit package in advance. A finance officer or bookkeeper who is not familiar with workers' comp or the changing rules around COVID may unwittingly make mistakes that are not easily corrected over a phone or video conference. It's our experience that virtual meetings are subject to more time pressure, communication issues, misinterpretations, and connection problems than an in-person audit.

2. Furloughed workers

   At the beginning of the pandemic, many states issued rules and new class codes for excluding payroll of furloughed workers. NCCI established Code 0012 and Delaware and Pennsylvania created class code 1212 which were set to expire on Dec. 31, 2020, but as the pandemic raged on new filings removed the expiration date, "until further amended as circumstances warrant in consultation with state regulatory authorities. " New York created 8873 which included workers who are reassigned to either (a) not perform any work duties (idle), or (b) perform clerical work duties at home, but this was discontinued as of July 25, 2021.

   The rules are very specific about when payroll for furloughed employees is excluded from the calculation of Workers' Compensation premium. The key is that these employees were not working at all and the employer kept separate, accurate, and verifiable records of the payroll. If separate, accurate, and verifiable records were not maintained, payroll is assigned to the classification for work normally performed by the employee before any emergency orders, laws, or regulations issued due to the COVID-19 pandemic. If the information is not provided in the form required, you cannot rely upon the auditor to ask about it, nor expect it to be excluded.

3. Reclassification

   When employees were forced to work from home, many states allowed businesses to reclassify employees temporarily to clerical telecommuters, which differs from in-office clerical classifications. To include this classification, payroll records must show when the employee's duties changed from the normal job at the workplace to work from home in a clerical capacity. They must also show when the employee returned to the workplace to resume his/her normal duties. If payroll records don't indicate the change in job duties, the employee will remain in the class code to which they normally would have been assigned. Essentially, this makes the auditor look at payroll week-to-week, which is extremely labor-intensive. If your records aren't clear, don't expect the auditor to do the calculation.

4. Employees are working from other states

   When all employees were working in the plant, many may have traveled from neighboring states, but the only state that had to be listed on the policy was the state where the business was located. But now those employees and others who moved out of state and are working remotely have created additional state exposures for workers' comp. The insurance company needs to be notified about the new primary state exposure and the payroll for those employees working from home should be allocated to the appropriate state. This is not only an audit issue but may also be a coverage issue.

5. Impact on the Experience Mod

   An employer's experience rating is determined based on the presumption that historical loss experience predicts future loss experience. For ratemaking purposes, pandemics are generally considered catastrophic events and not a reliable predictor of future experience. Therefore, all rating bureaus are excluding COVID-19-related claims from the determination of loss costs and rates.

   Some businesses that have experienced a dramatic drop in payroll may experience an increase in the Experience Mod if there is not a corresponding drop in claims values. This is particularly important for contractors that rely on a Mod under 1.0 to compete for contracts.

This is complicated and confusing and rules vary by state. The best way to protect yourself and avoid overcharges is to be prepared. As Certified WorkComp Advisors (CWCA), we are trained, certified, and mentored by the Institute of WorkComp Professionals (IWCP) to guide employers to the lowest possible workers' comp costs. This is our expertise, and we are here to help.