Premium Audit

The annual premium audit determines your company’s actual Workers’ Compensation insurance premium for the policy period, as opposed to the estimated premium established by the original 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, nor are all of these unwelcome changes truly correct and legitimate.

To avoid audit mistakes that can unnecessarily inflate your company’s Workers’ Compensation insurance premium, take the following steps:

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 work papers (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 time 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 well 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. 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:

  • The experience modification factor should be no higher on the audit than on the original policy
  • 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