If you’re like most employers, hearing the term “audit” is like seeing the reflective flash of red and blue lights in your rearview mirror when you know that you’re driving the speed limit.
You can be 100% certain that your business policies are infallible but the moment you receive an audit notice, you feel like you are rolling down your driver’s side window, guiltily presenting your license and registration, and accepting a speeding ticket.
What would you say if I told you that not all audits signal a worst-case scenario?
In fact, your annual workers’ comp insurance audit can actually be an asset to your business.
Here at Combined, our team understands the stigma that follows any auditing process. Our commercial insurance specialists have helped many employers overcome the fear of it and embrace workers’ comp audits as a business resource.
In this article, you will learn why your annual workers’ comp audit is not only important but also how it can work in your favor. This quick read will teach you 5 ways that a workers’ comp audit can benefit your business.
What is workers’ comp insurance?
Workers’ comp insurance provides benefits to employees who suffer a work-related injury or illness. It safeguards employees, in the event of a workplace accident, with financial support and medical expense coverage.
It usually covers the following:
- Necessary medical treatment
- Ongoing care or rehabilitation
- Lost wages
- Funeral expenses
- Disability benefits
Workers’ comp insurance also protects you, as the employer, from the liability of expensive legal damages following a worksite accident or injury.
What is a workers’ comp audit?
When you purchase your workers’ comp insurance, the cost of your annual premium is an estimate for the policy year.
The price of your coverage premium is determined by these 3 factors:
1. Employee classification rates – a rate usually determined by the National Council on Compensation Insurance (NCCI) or an independent state-regulated rating bureau that evaluates the amount of risk involved in the work your employees perform. The higher the risk, the higher the rating.
For example – the rate for a high-flying Cirque Du Soleil acrobat is going to be larger than the rate assigned to your neighborhood librarian. Why? Scholarly patrons angrily refusing to pay inflated overdue fees aside, the aerial performer experiences a greater level of risk on the job.
2. Total payroll – the total compensation paid to your employees in exchange for their work. To determine your workers’ comp premium, you pay your employee classification rates per $100 of total payroll.
For example – If your one employee receives an annual salary of $50,000 at an employee classification rate of $1, your total payroll would account for an annual $500 workers’ comp insurance premium.3. Experience modification factor – a numerical measure of your past workers’ comp claims used to predict your expected cost of coverage. The experience modification factor evaluates 3 years of claim history against the expected cost of claims for similar businesses.
If your past claims are less than the expected cost, you will receive an experience modification factor of less than one. However, if your past claims exceed the expected cost, you will receive an experience modification factor greater than one. When your annual premium is estimated, an experience modification factor of less than one discounts the cost while a higher one elevates it.
Used to predict a year-long policy premium, what do you notice about several of these factors?
Over the course of your policy year, they are susceptible to change:
If business is booming and you decide to hire additional employees, your payroll will increase. Or maybe, instead of hiring more employees, you decide to shuffle your workforce into different roles to increase productivity and your employee classification rates change. If layoffs impact your workforce, then...you get the picture.
At the end of the year, the cost of your estimated premium has to be adjusted to reflect any of these changes.
And how can you compare your estimated premium with your actual year-end cost?
With a workers’ comp audit.
A workers’ comp insurance audit is a review of payroll and employee classification records for the policy year. It is used to determine whether the estimated premium for the policy year and the actual year-end coverage costs match.
Why should you do an annual workers’ comp audit?
The plain and simple answer to this question is – because you have to. Your workers’ comp insurance contract legally requires you to complete an end-of-year audit.
But if requirement alone is not reason enough, let's explore the ways – and yes, there are many – that your workers’ comp audit can benefit your business.
5 ways your annual workers’ comp audit can benefit your business
Here are the top 5 reasons for and rewards of completing your annual workers’ comp audit.
1. Your workers’ comp audit prevents you from paying penalties
Your workers’ comp audit, as a legal requirement, has legal repercussions. If you fail to respond to your audit notice, you’ll face a noncompliance penalty – and a hefty one at that.
Depending on the location of your business, the fine for not completing your annual workers’ comp audit ranges from an additional 25% to 50% of your original premium.
Additionally, in response to noncompliance, should your carrier renew their offer of coverage, your premium for the next policy year may be increased.
Just by going through your workers’ comp audit process, you avoid an unnecessary penalty and an inflated future premium. By proxy, you save money.
2. Your workers’ comp audit ensures your insurance premium is correct for your coverage
Your workers’ comp audit makes sure that you have the coverage you need at the right price.
Each year, your workers’ comp audit serves to identify if your estimated cost was too much, too little, or right on the money.
If you paid too much for your premium at the beginning of the year, following your year-end audit, you’ll receive a refund for the difference.
In this case, your audit serves to save you money. Without it, you may have never even known you were overpaying for your coverage premium.
If your premium estimate was lower than the actual cost of your coverage, following your year-end audit, you’ll be billed for the difference.
Even though paying more for your premium at the end of the year probably doesn’t sound like a benefit, paying the premium difference annually ensures that your business does and continues to comply with workers’ comp insurance regulations.
Also, keep in mind, that your insurance carrier can conduct an audit up to 3 years after your policy year.
So, let’s say you didn’t go through the audit process for 3 years and have to undergo an audit for that entire duration. If you were paying too low of a premium for all 3 years, the cumulative bill you’ll receive may be unmanageable.
In the event of underpayment, like a convenient financing plan, conducting an annual workers’ comp audit prevents you from accumulating a staggering premium repayment charge.
3. Your workers’ comp audit eases the coverage renewal process
With few exceptions, you have to provide your employees with workers’ comp insurance.
If you fail to go through the end-of-year audit process, your insurance carrier may decide to revoke their offer of coverage.
This means that you have to search for a new carrier.
And, with a track record of not complying with the workers’ comp audit, finding a new carrier may be increasingly difficult.
Not only that, but any workers’ comp coverage offers you do receive will likely be more expensive, inflated by your track record of noncompliance.
By conducting your annual workers’ comp audit, renewing your coverage will be easy and cost-effective.
4. Your workers’ comp audit benchmarks insurance premium costs
Following your year-end audit, you have invaluable insight into the cost of your premium.
This means you have the information you need to compare your premium cost to that of other comparable businesses at your fingertips.
By using this data, you can improve your safety practices and programs to meet industry standards.
With this in mind, your audit allows you to identify areas where you can improve employee safety, minimize claims, and reduce the cost of your coverage premium in the future.
5. Your workers’ comp audit incentivizes organized record-keeping
Your workers’ comp audit involves an appraisal of your employee classifications and total payroll expenses.
And how does your auditor verify this information? By reviewing your job responsibility descriptions and payroll records.
For this to happen, you have to have these records updated, organized, and ready to be assessed.
Your workers’ comp audit, then, incentivizes orderly and accurate documentation. In doing so, it creates a safeguard for you against other unrelated and potentially damaging compliance complications.
Next steps to a worry-free workers’ comp audit
If you are here, you understand that the very idea of an audit can be scary.
By reading this article, you learned that your annual workers’ comp audit is not to be feared. In reality, completing it can be beneficial to you and your business.
For years, our team at Combined has helped businesses, both large and small, take this taboo test and transform it into a tactful tool. Our commercial insurance experts are ready to help you turn your workers’ comp insurance audit into a game-changing resource.
Leave your aversion to the workers’ comp audit with the alarming police siren lights – in your rearview mirror
This article is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.
