7 Secrets that Cost Your Client a Bundle on their Workers' Comp

Alert: Premium audit process may never be the same



Kevin Ring 9 months, 30 days ago

In 2021 WorkComp Advisors noticed that auditors were being far more aggressive than they had been in the past. In some respects, it was understandable. Payrolls and worker’s comp net written premium were down significantly in 2020 and it’s the auditors’ job to recoup as much as possible. Many expected a return to less aggressive approaches in 2022, but it hasn’t happened.

At a recent symposium of the Institute of Work Comp Professionals (IWCP), Kevin Ring, Chief Operations Officer and Lead Workers Comp Analyst, led a session on the emerging patterns in Workers’ Compensation audits across the country. No employer wants to be blindsided by unexpected costs at audit time. While it’s the agent’s job to know the rules and the potential pitfalls, employers need to understand the issues to stay vigilant throughout the year and keep the agent informed.

Certificates of insurance

In years past, it may have sufficed to show the auditor Certificates of Insurance (COI) for when the work began and when the COI was renewed. However, auditors are now picking up subs and independent contractors as uninsured during an audit, even if these certificates are on file. A certificate is a snapshot in time and only reflects the active coverage as of the date it was issued. It does not guarantee continued coverage.

Auditors are looking at verification databases and using other tools to identify COIs that may have been canceled during the policy period and to ensure that the COIs are not fraudulent. If it’s discovered that the certificate was not valid for any relevant time the company must document what was paid to the uninsured contractor, which the auditor will charge as payroll to your company, significantly increasing premiums. Keeping accurate records of the work they did, when they did it, and separating labor and material costs as well as strengthening certificate management and risk transfer mechanisms can limit exposure.

Owner exclusion from policy

Each state sets its own rules for when and how some owners and officers can opt to be excluded from a workers comp policy. Auditors are paying careful attention to such exclusions and are asking if the owner was working on the job. An owner or officer who opts to be excluded cannot recover workers’ compensation benefits from their policy if they are injured. In a few states, such as Florida’s carve-out for executive officers of construction companies, this exclusion extends to all other workers comp policies. However, in many states, this exclusion does not apply to coverage under other policies. So, if they are injured while working on the job, it’s likely the auditor will charge you.

Classifications

Classifications are a major determining factor of the premium an employer will pay for work comp coverage, so it’s critical to get it right. As job duties and roles change, it can be a ‘moving target’ and it’s important to keep tabs on it and keep your agent informed. Since the coding system is complicated, with nearly 700 different codes available, the auditor may determine it is the wrong code. While they may or may not be able to change it depending on what the business code is and the rules around adding classifications at the time of the audit, they will try and get it changed on the renewal. However, if the employer and underwriter are happy with the classification, the agent can work to get the underwriter onboard in contesting the change.

Rating bureaus are also looking closely at the complexity of the classification system. NCCI is in the middle of a multi-year project aimed at paring down the number of class codes, as is Pennsylvania.

Out-of-state coverage

Businesses that have employees working across state lines, even temporarily, have unique workers’ compensation obligations that vary by state and are endlessly complicated. Extraterritoriality addresses whether work comp protection follows the employee when they leave the “home” state to work on the employer’s behalf. Reciprocity addresses whether the receiving state recognizes and allows the use of the work comp following the employee from their home state. When not handled properly, the battle between extraterritorial provisions and reciprocity provisions can lead to coverage gaps and even loss of protection.

The best way to protect yourself is to recognize these issues and have an open line of communication with your agent. 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.