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Workers’ Compensation Insurance Audit: What Insurers Aren’t Telling You

Workers’ compensation insurance is often thought to be an expense beyond the scope of an employer’s control thanks to the audit process. It isn’t. Providing workers’ compensation has become a particularly dreaded cost for, thanks to insurers ability to charge exorbitant adjustments to premiums long after a policy’s date has effectively ended. This renders the initial cost of a policy essentially meaningless, making the real cost impossible to fully determine.

A legacy of shock audits (retroactively adjusted premiums that vastly exceed a policy’s initial cost) has caused employers to feel powerless in the wake of arbitrary costs for policies that have long since expired. To protect yourself from these astronomical fees, you must audit your auditors.

Like facility expenses, equipment, overhead, and payroll, workers’ compensation is a hefty expense, yet isn’t static and can be negotiated for better rates and service levels. In this blog, we demystify an auditing process that can cost your company millions of dollars and offer suggestions to take control of these expenditures. By being proactive and understanding the audit processes of insurers, you can eliminate the potential shockwaves of future expenses.

The Fundamentals of a Workers’ Compensation Insurance Audit

You may have every safety measure and OSHA standard in place to protect your employees, but you’re still required to carry insurance – even if you’ve never had a claim.

Each year, workers’ comp insurers return to audit your payroll, your experience modification rates, and your use of outside contractors to ensure that your current policy is adequate for your business and to make sure you’ve paid enough for the prior policy year. These audits are complicated and time-intensive. Steps must be taken to ensure your rates remain low while adequately protecting your company, especially for companies with complex payroll.

Insurers begin adjusting premiums by placing employees into hundreds of risk categories related to the work they do. Even a small adjustment can have a dramatic impact on what it costs to insure them. In one instance, a clerical worker was shifted to the same risk category as machine-floor workers because she walked past machines on her way into and out of the building.

These sorts of extreme assessments of your workplace are all too common in these litigations. But they also present an opportunity for companies who take a proactive stance to net tremendous savings.

How Do Insurance Companies Audit Your Company for Workers’ Compensation Insurance?

The objective of an insurance company is to use tools to maximize their billing by misrepresenting your payroll and work environment. With a large pool of resources, they can quickly file suits for the payment of these erroneous premiums.

Every year, you will have to submit to an annual workers’ comp audit. At face value, this is intended to ensure that the rates and coverage in your initial policy are accurate. However, there is no way to know just how aggressively an insurer will attempt to maximize their remuneration for expired policies.

An auditor will analyze your HR records for:

Once the insurance companies have completed their review, findings will be presented in the form of adjusted premiums. You have a right to question an insurance company’s classifications and policy structure, or at minimum search their findings for abnormalities and errors.

Auditing the Auditor

The most powerful tool your company has against workers’ compensation insurance audits is turning the tables on them. In some states, you can reverse additional charges imposed on your company up to five years after they have occurred.

What steps can you take for a successful re-audit?

  1. Preparation – Have your payroll and tax records ready, as well as a complete understanding of the classification codes that apply to your business. Understand your company’s use of subcontractors and their adherence to their own workers’ comp policies. Review all non-HR materials that an insurer might use to redefine your operations, such as a company website or promotional materials.
  2. Review Payroll and Classifications – A few miscalculated or misclassified employees can add thousands in increases to your premiums. Review your original policy estimate against your current policy and note discrepancies. By understanding your state’s history of reading classification codes and comparing them against your workforce, you can better argue against an audit.
  3. Depend on Expertise – Larger businesses typically employ dedicated staff that prepares for annual audits and questions their results. Companies that do not keep this in-house should depend on third-party expertise to fight on their behalf. As formulas for EMR calculations are in a state of flux, experts are best suited to question audits.

Compensation audits are time-intensive, complex tasks that require a high degree of expertise to successfully implement. Relying on outside help is typically the best option for saving your company millions. High-quality third-party experts in the domain of workers’ comp insurance will know exactly where your operations stand in the shifting legal and institutional frameworks of your insurer, your policy, and your premium. They will have access to large bodies of data that situate your organization and your insurance costs among thousands of other companies to determine your coverage.

A hallmark of good external consulting is that it should cost you nothing upfront and nothing if it does not succeed in the purpose for which you are acquiring it. At SIB, we only get paid if we save you money, ensuring that we will fight on your behalf to net as much savings as possible. Contact us today for more information about our services.