Issue: Insurers incorrectly calculate workers' compensation premiums for 30 to 40 percent of employers.
Benefit: You can help slash premium costs, and become a hero to your CEO, by knowing what mistakes to look for.
Action: Work with finance to initiate a premium audit to spot errors in employee misclassification and other issues.
When an Illinois construction company suspected it was overpaying its workers' comp premiums due to employee classification errors, the company stopped paying premiums and asked to renegotiate rates. The insurer resisted and sued for back premiums.
The result: An audit of the company's records discovered the company's overpayment to the tune of $5 million. The case was settled for $2 million in the employer's favor.
That company was one of the smart ones; most employers never question or detect mistakes made by their workers' comp insurers in calculating premiums and handling claims.
Test audits by the National Council on Compensation Insurance report premium error rates of 30 percent to 40 percent. Yet worker's comp insurers often don't find their mistakes, hardly ever admit them and are quick to sue complaining companies that withhold premiums.
"If your instinct says there's been a mistake, follow up," says Edward Priz, president of Advanced Insurance(AIM), which performs workers' comp premium audits for employers.
Be especially aware of these two most common errors:
1. Incorrect job classification codes and experience ratings. Insurers calculate premiums, in part, by assigning classification codes to each position, based on risk level. But more than 600 codes exist, and the rules are complex, so it's common to find employees listed in the wrong category, which increases your premiums.
Advice: Periodically review your classification codes or have a workers' comp consultant do it. Also, learn what you can about workers' comp law in your state; a bit of knowledge can go a long way.
Example: An insurer assigned new classification codes that increased a company's premiums. The company balked, arguing that a state law prevents insurers from changing codes late in the policy's life. The insurer corrected the mistake.
2. Insurers' errors during payroll audits. Before they renew policies, insurers typically run payroll audits to determine how much of your payroll is applied to various risk classifications.
Since insurers want to maximize premiums, their "mistakes" often lead to you paying more. According to Premium Review Associates, watch for insurers who:
- Assign payrolls to job classifications with high rates.
- Include commissions without deducting expenses.
- Charge for subcontractors who are separately insured.
- Overlook legitimate deductions.
Advice: If you perform your own audit, gather data from the past five years, including billing statements, auditor's work sheets, loss-history summaries and experience ratings. If you don't have these, ask your insurer.
Your best bet: Contract with an independent adjuster who can analyze your workers' comp calculations, pinpoint overcharges and help you earn a refund. Stay away from adjusters who request upfront fees. Most adjusters work on commission or an hourly rate.
Online resource: Access workers' comp advice sites (plus links to all 50 states' workers' comp departments) at www.iaiabc .org/links.htm.
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