Workers' compensation insurance is an essential safeguard for both employees and employers. It provides financial protection in the event of workplace injuries or illnesses. However, the process doesn't end with securing a policy.

Insurance companies will often audit workers’ compensation plans to make sure the premium calculations are accurate. They also want to make sure the plan is in compliance with state regulations.

Below we'll review what a workers' comp audit involves, including its purpose, the expectations during and after the audit, tips for preparation, and more.

What is a Workers' Comp Audit?

A workers' compensation insurance audit is a thorough examination of a business's records and operations to verify the accuracy of the premium payments made for the workers' comp policy. The audit will verify your company’s payroll, among other relevant information. This process ensures that the premium calculations align with the actual exposure and risk associated with a business's workforce.

Workers’ comp premium audits are legally required when you have a workers’ compensation policy.

What is the Purpose of a Workers' Comp Insurance Audit?

The primary purpose of a workers' comp insurance audit is to reconcile the estimated premium paid by the employer with the actual exposure and risk associated with the workforce. The audit ensures that the premium accurately reflects the number of employees, their job classifications, and the nature of the work they perform.

The goal is to prevent underpayment or overpayment of premiums, maintaining fairness and accuracy in the workers' compensation insurance system.

What to Expect During and After a Workers’ Comp Premium Audit

During the Audit:

1. Documentation Review: The workers’ comp auditor will review various documents, including payroll records, employee classifications, job descriptions, and any certificates of insurance for subcontractors or independent contractors.
2. Employee Interviews: The auditor may conduct interviews with employees to verify job duties and classifications, however this is very rare.
3. Site Visits: In some cases, yet very rare, the auditor may visit the workplace to assess the operations and ensure that the information provided aligns with the actual work environment.
4. Verification of Subcontractor Coverage: If subcontractors are used, the auditor may verify that they have their own workers' comp coverage or are included in the policy.

After the Audit:

1. Premium Adjustment: Based on the audit findings, the insurance carrier will adjust the premium. This could result in an additional premium payment or a return premium if the actual exposure was lower than estimated.
2. Policy Renewal: The audit may impact the terms and conditions of the workers' comp policy upon renewal, including changes to classifications or rates.

How Are Costs Calculated for a Workers’ Comp Policy?

Workers' compensation insurance costs are typically calculated based on several factors, including:

1. Classification Codes: Different job classifications have different associated risk levels, and each is assigned a specific classification code.
2. Payroll: The total annual payroll is a significant factor in premium calculations. It's multiplied by the rate assigned to each classification code to determine the basic premium.
3. Experience Modification Factor (Mod): The experience mod is a factor that reflects a business's claims history. A lower mod may result in a lower premium, while a higher mod could lead to a higher premium.
4. Rates: Insurance carriers assign rates to each classification code based on the associated risk. Rates are expressed as a cost per $100 of payroll.
5. Policy Deductibles: The presence of deductible options can impact premium costs, with higher deductibles potentially lowering premiums.

What Happens if You Ignore a Workers' Comp Audit?

Ignoring a workers' comp audit can have serious consequences, including:

1. Policy Cancellation: The insurance carrier may cancel the policy for non-compliance. If the carrier is no longer your insurer during and or after the audit then they are unable to cancel your current coverage. However, they may send you to collections and seek legal action.
2. Loss of Coverage: Without workers' comp coverage, businesses may face legal repercussions, fines, and potential lawsuits from injured employees.
3. Loss of Business: Many clients and contractors require proof of workers' comp coverage. Lack of coverage can result in the loss of contracts and business opportunities.
4. Legal Consequences: Non-compliance with workers' comp laws can lead to legal penalties and fines imposed by state authorities.

How to Prepare for a Workers' Compensation Audit

To ensure a straightforward and accurate audit process, businesses can take the following steps:

1. Maintain Accurate Records: Keep detailed and accurate records of payroll, employee classifications, job descriptions, and subcontractor information.
2. Regularly Update Information: Inform the insurance carrier of any changes in operations, job classifications, or payroll to ensure that the policy reflects current circumstances.
3. Understand Classification Codes: Be familiar with the classification codes assigned to different job duties within the business.
4. Review Subcontractor Agreements: Ensure that subcontractors have their own workers' comp coverage or are included in the policy.
5. Employee Classification Verification: Regularly review and verify that employees are classified correctly based on their job duties.

What Happens After a Workers’ Compensation Premium Audit

After the audit is completed, businesses can expect:

1. Premium Adjustment: Based on the audit findings, the insurance carrier will adjust the premium. This could result in additional payments or a return premium.
2. Renewal Adjustments: The audit may influence the terms and conditions of the workers' comp policy upon renewal, including changes to classifications or rates.
3. Policy Updates: The insurance carrier will provide updated policy documents reflecting the changes resulting from the audit.

Get a Workers' Comp Quote from JVRC Insurance

If you’ve recently had an audit and want to lower your workers’ compensation insurance premiums, JVRC Insurance can provide a custom quote to meet your specific needs. To get started, reach out to JVRC Insurance for a workers' comp quote and ensure that your business is adequately protected with accurate and fair coverage.