The policy contract grants the carrier certain rights with regard to auditing actual exposures, but there are no policy provisions or Basic Manual rules that dictate the methods. Each carrier establishes its own rules with regard to the level at which it relies on telephone or mail-in audits, or if it performs physical audits.
Rules
Under the terms of the workers compensation policy, a carrier or the ICRB may audit the insured's records within 3 years after the policy period ends (reference: The Forms Manual, WC & EL Policy section, page 5, Part Five-Premium, Rule G. Audit).
As well, Rule E. Final Premium states that "The final premium will be determined after this policy ends by using the actual, not the estimated, premium basis and the proper classification and rates that lawfully apply to the business and work covered by this policy. If the final premium is more than the premium you paid to us, you must pay us the balance. If it is less, we will refund the balance to you."
Also, the URE Workers Compensation Statistical Plan Manual, Part 3.6. Exposure Amount states that "The exposure reported on the 1st report must be the audited exposure corresponding to the charged premium amount and class code on the 1st report. When a final audit has not been made at the time of filing a report, submit the estimated exposures and identify them as estimated on the 1st report. Without further request, correct estimated exposures as soon as audited exposures are available."
Communication is Key
Sometimes when a carrier, agent, and insured fail to communicate in a timely manner on an audit request, resulting in no audit being performed, the carrier will arbitrarily increase the payroll and issue a final bill. There are no Bureau rules that address this action. Eventually, the information needed to complete the audit must be supplied by the insured so that actual numbers can be applied to obtain the correct premium charge.
Occassionally, we get calls that an insured and agent do not know why the carrier billed for more premium. For an assigned risk employer, the servicing carrier is required to submit a summary of the audit results with each bill and must also include a telephone number or address for the insured or agent to call. Rule reference: Servicing Carrier Reference Guide, Part 5, Page 5.38.
It's a normal procedure for assigned risk policies to base the renewal on past payroll experience. Unfortunately, because it is common enough for assigned risk employers to understate payroll to keep the premium downpayment low, our servicing carriers are fairly strict on their renewal quotes. However, common sense should always prevail, and if an employer is truly downsizing, there should be a way to communicate/prove that to the servicing carrier (most recent quarterly payroll tax 941 form, statement from a CPA who keeps the books, etc.), so that a reasonable payroll estimate can be used.
Audit Tips for Employers
Prepare a test audit on a spreadsheet, so you know what to expect
Separately show overtime
Have certificates for subcontractors on file
Be present at the time of the audit
Get a copy of the audit worksheet
Discuss any differences with the auditor while you're together
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Premium audits continue to be a source of misunderstanding and consternation for many businesses, especially those that are involved in the construction industry and in construction-related trades. Premium audits are a means of obtaining information to determine the actual payrolls, sales, or other variable information that is used to calculate initial insurance premiums. Premium audits are a standard industry practice and insurance companies have the contractual right to audit policies they write. Insurance policies subject to premium audits include workers compensation and general liability.
To help avoid audit mistakes that can lead to higher insurance premiums, here are some suggestions:
Before the Audit:
(1) Make a thoughtful decision about who from your company will be best able to work with the auditor.
(2) Review prior years' audit billing statements and auditor's work sheets.
(3) Gather pertinent accounting records, such as payroll journals, sales journals, cash disbursement journals, general ledgers, social security
reports, and state unemployment tax returns.
(4) Review payroll documents to make sure that the records include breakdowns of wage types by employee, department and class code.
(5) If subcontractors or independent contractors are used, make sure to have on file certificates of insurance documenting that they have their
own workers compensation and general liability insurance.
When the Auditor Arrives:
(1) Request that the audit take place on-premises so that all pertinent records are readily available.
(2) Ask questions during the audit to clarify areas you do not understand.
(3) Before the auditor leaves, ask for a hard copy of their specific findings.
After the Audit:
When the audit billing statement is received, review it carefully and compare it to the original policy. Note all changes and discuss any
questionable areas with the auditor before agreeing to pay additional amounts due.
By: Kevin L. Glaser, CPCU, CIC, ARM, AAI, AIS, ARM-P
President, Risk & Insurance Services Consulting, LLC
Oconomowoc, WI
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Assigned Risk Market - Servicing Carrier Standards for Audits
E. Performance Standards, 2. Underwriting, b. Midterm, (2) Endorsements
(b) Within fifty (50) days of the accurate determination of the exposures and payroll associated with the policy period being audited for final physical audits, preliminary physical audits, or receipt of exposure and payroll information from the insured and/or its representative for mail/telephone final audits, or otherwise determined, the carrier must issue an additional premium endorsement if the additional premium generated is at least $500 or 25% of the estimated annual premium, whichever is the greater lesser amount.
E. Performance Standards, 5. Audits, a. Audit Requirements, (2) Timing and Procedures
(a) Audits will be completed, billed, and recorded on the company records within seventy-five (75) days of policy expiration or of the effective date of cancelation...
(b) If an insured disputes an audit, the carrier shall contact the insured and resolve issues concerning the accuracy of the audit within forty-five (45) days from the date of receipt of written notice of the dispute. The dispute should be concluded either by revising the audit billing, or by written notice to the insured that the original audit is accurate.
E. Performance Standards, 3. Billing & Collection of Premium, a. Billing Procedures, (4) Return Premium
Statements and return premium checks shall be mailed within fifteen (15) days of recording on company records. Return premium checks shall be made payable to the insured, unless directed otherwise by a valid power of attorney on file with the servicing carrier. Return premium checks shall be payable on the gross amount of the return premium. A bill for the unearned commission may be sent to the producer of record or an offset shall be made against other commissions due to the same producer from the carrier on other assigned risk business.
Keeping Track of Certificates of Insurance
Without certificates of insurance from subcontractors on file, your workers compensation insurance company will probably charge premium to cover those subcontractors because they would appear to be uninsured. Apparently there are several firms who offer services to track certificates for employers, agents, and insurance companies. Here's a list, although the ICRB does not endorse any of them.