Carrier or the ICRB may audit the insured's records within 3 years after the policy period ends.;
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.
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).
Rule G. Audit "You will let us examine and audit all your records that relate to this policy. These records include ledgers, journals, registers, vouchers, contracts, tax reports, payroll and disbursement records, and programs for storing and retrieving data. We may conduct the audits during regular business hours during the policy period and within three years after the policy period ends. Information developed by audit will be used to determine final premium. Insurance rate service organizations have the same rights we have under this provision."
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 Statistical Plan - 2008 Edition Rule 3-F-1 Payroll Exposure 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."
Failure to Comply with Audit
This new Basic Manual Rule 3-A-13-b. provides a consistent action step by carriers when an employer does not allow the carrier to examine and audit its records, as required by the WC policy. The rule would allow a carrier to invoice up to two times the estimated annual premium. The additional amount is intended as a coercive penalty for noncompliance rather than additional premium. Hopefully, when the employer consents to the premium audit, the invoice will then be adjusted to the correct amount.
With no rule to guide carriers, their next action steps could be the use of a collection agency or attorney to collect the debt. Ultimately, a carrier may bring a civil action in an attempt to collect the premium, attorney fees, and interest.
Under Indiana law (IC 27-1-31-2), a carrier may cancel a policy due to misrepresentation. This reason might apply in a case where an employer didn't pay premium and goes to a new carrier and declares there is no premium owed to prior carriers.
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 references: Assigned Carrier Performance Standards—INDIANA, PS 7-A-2-g; and 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
Employers should be prepared to share payroll journals, sales journals, cash disbursement journals, general ledgers, social security reports and state unemployment tax returns, certificates of insurance, and state exemption forms, if applicable.
List of documents that could be requested for a premium audit:
- Payroll records, including gross pay and overtime pay by employee or department. These records can be reconciled to line 5c on your IRS Form 941’s.
- 941 tax forms
- Income Statement or Profit & Loss
- Corporate Taxes, including all forms and schedules
- Cash Disbursements Journal and/or General Ledger, including all ledgers accounts and/or journals
- Bank Statements, including copies of all checks
- 1099 and 1096 tax forms
- Valid certificates of workers compensation insurance related to subcontractors, if applicable
- List of officers/owners including name, title, % ownership, and duties
- Completed job contracts/work orders available upon request
|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
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.
Indiana maintains a more detailed standard on billing documentation, effective January 1, 2011 from Indiana Item Filing RM-01-IN-2010. Here’s an excerpt of the rule:
Assigned Carrier Performance Standards—2009 Edition—INDIANA
Performance Standard 7—Billing and Collection of Premium
A. Billing Procedures
2. Billing Statements
Change PS 7-A-2-g as follows:
g. Billing statements must include a clear explanation of the bill and specific information on how the employer may inquire about the billing determination. The assigned carrier is to include a statement of the basis of premium due. This statement includes, but is not limited to, revised payrolls, changed classifications, an itemized calculation, and a copy of the audit or appropriate documentation with the invoice to the policyholder. For more information about customer service, refer to PS 2.
Keeping Track of Certificate of Insurance
Without a certificate 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.