Workers Compensation Audit
Disputing A Workers’ Compensation Premium Audit
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 therating 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, we may well be of assistance in advising you as you consider your options.
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.
Workers Compensation Classification Codes: NCCI & Others
Insurance companies use a classification system to calculate Workers Compensation insurance premiums. This classification system is one of the fundamental aspects of pricing Workers Compensation insurance in the United States. This system assigns different workplace exposures into a system of codes, each one with a manual rate commensurate with the risk associated with that kind of work in a particular state.
To use an obvious example, the classification code for a clerical worker (Code 8810) should carry a significantly lower rate than the code for a roofer, (Code 5545)because the odds of a roofer being injured are much higher than those of an office worker. The manual rate for a clerical worker might typically be around $0.40 per hundred dollars of payroll, while the manual rate for a roofer would typically be more like $40.00 per hundred dollars of payroll.
Of course, once you move beyond such obvious examples, the question of proper classification of workplace exposure can get a lot more complicated. Incorrect classification of workplace exposures is one of the most common mistakes that we finds and corrects for clients
In most states, the classification system used is one devised and maintained by NCCI, the National Council on Compensation Insurance. NCCI is an independent organization, an “Advisory Organization”, to use the current preferred term. (Most insurance people still refer to it as a “Rating Bureau”). Generally, insurance companies don’t develop their own classification systems for Workers Comp, but instead find it more convenient to use a system developed by such a rating bureau.
NCCI is largely funded by insurance companies, and insurance company executives make up a majority of its board members. But NCCI is independent of those insurance companies, or at least as independent as any organization can be that has such close financial and management ties with the insurance industry.
NCCI has devised a classification system used by insurance companies to of approximately 550 classification codes, intended to cover workplace exposures. NCCI devises the manuals and rules regarding classification that are used in most states, and also is responsible for determining the correct classifications for particular employers (in those states that use the NCCI system). NCCI details what kinds of work are intended to be included in each classification code in the “Scopes manual”. The Scopes manual is published and updated regularly by NCCI, and filed with and approved by state insurance regulators. The Scopes manual is copyrighted by NCCI, so the only way to obtain a copy of this manual is to order one from NCCI.
There are a handful of states that do not use the NCCI classification system: California, New Jersey, New York, Delaware, and Pennsylvania are states that have their own classification systems. Texas licenses much of the NCCI system, but makes significant variations in specific classification rules. Many other states have some “state special” classifications that vary significantly from NCCI definitions for certain workplace exposures. To see which states are NCCI jurisdictions and which have independent rating bureaus, consult our state-by-state directory.
In general, the NCCI classification system seeks to classify the overall business enterprise of an employer, not the particular work performed by specific employees.For that reason, a janitor working at a manufacturing plant will be assigned to the overall manufacturing classification used by that plant, not to a janitorial classification.
The NCCI classification system makes an exception to this approach for construction-type classifications. For these employers, multiple classifications may be assigned to employees, depending on the actual work done. But work records must show specific hours at the various tasks for a worker’s time to be split among the appropriate classifications.
Even for non-construction employers, more than a single classification code is usually used on a policy, because the NCCI has established that certain workplace exposures are almost always eligible to be broken out into their own classification–clerical, outside sales, and sometimes (but not always) drivers.
Determining what the proper classification code is for a particular employer is not always easy, even for NCCI. We helped a number of clients who were misclassified into more expensive classes not just by their insurance company, but by NCCI itself. This is not so much a criticism of NCCI itself as it is a reflection of the complexity of the classification system. Sometimes small details can make a big difference in which classification code is assigned to an employer, which in turn can make a big difference in rates and premium.
Often, we find employers misclassified into a more expensive classification for years, in spite of competitive bidding by various agents and insurers.
We often asked by employers if they can find details of this NCCI classification system online. The answer, surprisingly, is no. One would think that such information would be publicly available somewhere on the internet, as it is so fundamental to the pricing of Workers Comp insurance. But NCCI views that manual, known as the Scopes manual, as proprietary and copyrighted material, which they sell. So NCCI doesn’t want that material available freely. To get that information, one must purchase a copy of the manual from NCCI, either a hard copy or an electronic subscription.
An employer may be able to get information about specific classification entries in the Scopes manual from their agent, but not all agents have up-to-date copies of this manual.
We don’t sell insurance. Instead, we consult with employers about proper Workers Compensation insurance classifications, experience modifiers, payroll audits, and other technical aspects that determine Workers Compensation insurance premiums.
We helps employers successfully dispute classifications used by insurance companies. We also provide expert witness services in legal disputes with insurance companies over proper classifications, rates, experience modifiers, and audit premium charges.
Workers Compensation Overcharges:
How and Why Employers Often Overpay
We have been finding and recovering overcharges in clients’ Workers’ Comp insurance premiums but new prospective clients often ask us, how common can such overcharges be? Aren’t insurance agents and brokers usually catching such problems?
The system for computing Workers’ Compensation insurance premiums is a complicated one, involving interactions between insurance companies, rating bureaus, insurance agents, and of course the insured employer. With so many players working with such a complicated system, errors are inevitable.
Consider that, within the NCCI classification system, there are around 600 different classifications (more like 2,000 when you add in all the state special classes.) And the rules for applying those classifications are complex and sometimes counter-intuitive. And of course, they are subject to regular revision.
And some states don’t use the NCCI system, but instead have their own classification systems. So the right class for your business in one state might be wrong in another.
That errors are common is born out by NCCI’s own experience performing what are called “Test Audits”. This is a program where NCCI double-checks the premium computations of insurance companies on a spot-check kind of basis.
Error rates of 30% to 40% are reported in the handful of states that have a Test Audit program. But most states don’t have a Test Audit program. (And the NCCI test audit program doesn’t even check all the parameters that our review covers.)
So it’s incumbent upon employers, the ones who ultimately pay for this system, to do what they can to protect themselves from such industry mistakes. For it’s been our experience that most of the mistakes we discover increase premium, rather than decreasing it. It seems the insurance industry does a better job of catching and correcting those mistakes that serve to cost them money than fixing those that bring in additional income.
There’s no sinister conspiracy at work here–at least, not that we’ve seen– most insurance people are dedicated and ethical professionals. But something seems to happen in the operation of the system, something that somehow takes on a life of its own, and causes mistakes that increase premiums to often go uncorrected.
We’re experienced in finding and recovering overcharges that occur because of mistakes in classification, Experience Modification Factors, payroll audits, and other technical factors that can increase premiums improperly.
Sometimes, prospective clients tell us that they think their agent should provide such service, and that they expect that they are already receiving such service. But we can only say that, if agents were catching all the mistakes that occur, we wouldn’t be able to earn a living by specializing in catching and correcting them.
We don’t blame agents for this. Most agents are dedicated professionals who work hard to take care of their clients. But many of these technical mistakes that we find are just out of the hands of agents. The system is set up in such a way that it’s difficult, if not impossible, for agents to catch and correct many of the kinds of mistakes we find.
For instance, when it comes to determining proper classifications, most of the decision making is out of agents’ hands. That’s handled by insurance company underwriters, the rating bureau, and premium auditors. Agents have to rely on these other parts of the system to perform well, and agents often have very limited ability to influence decisions made by these others.
It reminds us of what Ronald Reagan said, years ago, about dealing with the Soviet Union in some treaty matter.
“Trust, but verify,” he said, quoting an old Russian proverb. It seems that, when it comes to Workers’ Compensation premiums, that proverb could serve many employers well also.
Warning Signs of Overcharges
Over the years, we’ve found that certain things can be red flags for overcharges–indicators that something may have been overlooked or not done properly and may have caused Workers’ Comp premium to be higher than proper. Here are some common ones:
- Classification changed to a more expensive one after policy begins
- Classification changed recently to a less-expensive one (raising the question, should the employer been in the less-expensive class in years past as well?)
- Increase in experience modification factor after the policy begins
- Recent changes in ownership
- Recent changes in business operation
- Employer has recently left employee leasing relationship
Any of these can be an indicator that overcharges may lurk in the current or recent policies. We are more than happy to check over current and recent policies and audits to see if any recoverable overcharges have in fact occurred.
Workers Compensation Audits: How Employers Should Prepare
The annual premium audit determines your company’s actual Workers’ Compensation insurance premium for the policy period, as opposed to the estimated premium originally used on the policy. Sometimes there can be dramatic changes in premium based on audit results, and not at all of these changes are welcomed by insured employers. Often these unwelcome changes are not truly correct and legitimate, per the rules that govern Workers’ Compensation insurance. (AKA Workman’s Comp.)
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.
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.
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.
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.
When The Auditor Arrives
If at all possible, have a comfortable and well illuminated work area available for her or him. We recommend 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.
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. Normally, the experience modification factor should be no higher on the audit than on the original policy.
The 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 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.