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What to Know for Workers’ Compensation Audit

What to Know for Workers’ Compensation Audit

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Home Vendor News What to Know for Workers’ Compensation Audit

An insurance company’s audits are a way of verifying the policy’s payroll data and job classifications are on target. This information is required to ensure that the insurance company is getting the appropriate premium for your business.
Although most people run and hide when they hear the word “audit”, this is simply the insurance company doing its due diligence by verifying payroll, making sure they have the correct job classifications, and making sure that each classification has the correct payroll assigned to it. For instance, if you use sub-contractors on a job, the insurance company will verify that these sub-contractors have workers’ compensation coverage. If they do not, it is added to your workers’ compensation, because the law requires you to provide them with workers’ compensation. Problems arise when companies are ill-prepared for the audit.
Make sure you have a really good grasp on all the key information prior to the Auditor arriving. Here are some of the key areas you should pay particular attention to:
The Payroll Audit: No overcharges. No errors.
Workers’ compensation costs are likely 20-40% of your overall insurance costs. When your insurance policy first goes into effect, your premium is based on assigned classifications, estimated payrolls (referred to as remuneration) and an experience modification factor.   At your policy’s expiration, the insurance company conducts a payroll audit and converts estimated payrolls into actual payrolls. It then assigns these payrolls to a classification. To simplify the audit process, it is designed that all mistakes or missing information default in favor of the insurance company. When jobs are misclassified, it can be a nightmare.   But this can be avoided.  Here’s an example.
A large construction company was experiencing high insurance premiums and experience mod trending in the wrong direction. The culprit was a lack of job descriptions and clarifications, which resulted in lump sum payrolls being assigned to the highest rated code on the policy. Once detailed job descriptions and separation of duties were established, it allowed all employees on the payroll to be assigned appropriate class codes. As a result, the insured annualized premium dropped approximately $18,000. Along with the premium savings, the increasing experience mod stabilized.
By preparing a complete and thorough audit package when your policy starts, you guarantee an accurate, mistake-free, time- and money-saving audit. Remember, the chance you’ll win the lottery is about 1 in 121 million–which are the same odds of you having a successful insurance audit if you’re not prepared. You want a perfect audit just as you want a perfect income tax filing.
Steps to Take in Getting Ready for the Auditor

  • Schedule the audit for after lunch, late in the afternoon, and preferably on a Friday.
  • Treat the Auditor as a welcome guest and provide him or her with a quiet, well-lit space in which to work.
  • Assign a knowledgeable, friendly staff member to work with Auditor, and escort the Auditor on a tour of your location if requested.
  • Answer the Auditor’s specific questions, but don’t offer additional information. A written “basic” description of your business or operations is a valuable tool for limiting the scope and number of questions asked.
  • Do not guess at an answer. Telling the Auditor you will send additional info as needed is the proper response when you don’t know the answer. Do not guess at any answer.

Preparing Records for the Auditor

  • Having a prepared summary showing the total payroll, summarized by class code, is the best way to achieve positive audit results.
  • Subtract excluded remuneration: (officers’ exemptions, overtime, rewards for invention or discovery, severance, etc.).
  • Verify your math is accurate and balanced to payroll records and to your prepared summary sheet.
  • Review Certificates of Insurance from sub-contractors separating labor and hard costs of supplies which should not be included for workers’ compensation.
  • Copy and secure Certificates of Insurance for all subcontractors being sure their policy dates cover the period they worked for you. Hand package to the Auditor with workers’ compensation on top, your actual payroll report/run next; then your quarterly payroll reports; sub and sub-cert information.
  • Ask the Auditor to leave you a copy of his/her audit worksheet so you have it on hand to refer to if questions arise. This is a necessity; you need a copy.
  • Ask the Auditor to explain their results/summary before they leave after the audit
    Get a copy of the Final Audit Billing
    B. Verify deposit premiums and applicable credits, discounts, use of correct experience mod
    C. If billing matches summary page, close case; if not, review Auditor’s worksheet for any discrepancies.
    D. Negotiate to close

According to the Institute of WorkComp Professionals, 75% of workers’ compensation audits are wrong. Don’t let yours fall into the “wrong” pile. You don’t have to be a Boy Scout to Be Prepared.
James Morgan began his career in the insurance business in 2006. He is Senior Vice President as well as a Certified WorkComp Advisor and Master WorkComp Advisor with Towne Insurance Agency. James’ extensive knowledge in workers’ compensation has enabled him to provide valuable assistance to his clients in many different areas including: uncovering errors, recovering overcharges, analyzing and verifying experience mods, hiring practices, safety programs, compliance issues, and managing injuries. He can be reached at JMorgan@towneinsurance.com
 

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