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Nowadays,
sadly, business managers can't truly rely on their
Workers Compensation insurance company to use the
correct classification code and rate when quoting the
insurance, or when the insurance company issues the
policy.
Sometimes this may be because the insurance agent or
broker is trying to keep initial premium charges low and
so doesn't use a truly reasonable distribution of
estimated payroll among classifications.
Remember, the initial premium on the policy is just an
estimate, and sometimes there can be huge increases that
only show up after the policy ends, when the audit is
done, and a cold-eyed auditor looks at payroll and at
how that payroll is allocated among your different
classifications.
The particular methodology used originally on the policy
to come up with your initial estimated premium doesn't
really bind your insurance company to follow that
methodology later on, when the audit is done.
One common cause of what we term Shock Audits is when
the auditor uses a very different methodology to
calculate the final premium, changing classifications or
changing how payroll is distributed among
classifications.
The classification code determines the manual
rate used to price the insurance, and thus has
a very large impact on the
premium charged for the insurance.
In most states, there are a total of around 600
different classifications available, each with its own
rate that typically gets adjusted on an annual basis.
These rates vary from state to state and often can vary
(at least a bit) from one insurance company to another.
Incredibly, some large national insurance
companies have admitted that
they do not even think about whether
the classification codes initially used
to propose the insurance, and to issue the policy, are
correct.
This means that these insurance companies do not
review the classifications as part of the initial
underwriting process.
And that can be a serious problem for businesses
in two distinct ways.
If the insurance
policy classification used is more expensive than the
correct class, it means that overcharges
can be perpetuated for year after year
after year.
We often find business that have been
overcharged by the same incorrect classification
and rate for five years, ten years, sometimes
even longer.
But the opposite classification error
can be even more devastating
for a business.
If the initial underwriting produces a quote and
a policy with a classification that is less
expensive than what the insurer may later
decide, insurers feel free to add the
more expensive classification when they
do the audit (after the policy
has ended.)
Consider a recent case of ours: the business
managers bought a Workers Comp policy from a large
and well known insurance company with
initial premium of around $30,000
per year. Later, after the policy ended,
the premium auditor decided the classification
wasn't really right, and changed it.
The audit then billed over
$500,000.00, after the policy ended, for a
policy the business bought for $30,000.
And when the business didn't pay this Shock Audit,
the insurance company sued them for $1,000,000.00
(covering two policy periods using the more
expensive class.)
These insurance companies claim that they rely
on the brokers to know the correct class code at
the time the application is submitted--even
though insurance brokers and agents don't really
get trained in the complexities of Workers Comp
classification rules.
Whatever familiarity insurance brokers and
agents obtain is typically from experience and
informal feedback. Tellingly, the Workers
Compensation insurance policy itself gives no
authority to insurance brokers or agents in
regards to determining correct classifications.
This can be a recipe
for disaster.
A.I.M. can provide your company with an expert and
independent report on correct classifications for your
business at a reasonable cost.
For a flat $300 fee, A.I.M. will
review your company operations and issue
a report on your current classifications and
identify any errors in classifications.
If your classification code is more expensive than
proper, we can advise how to pursue refunds.
If your classification codes look to be less
expensive than what your insurance company
might later try to add at the audit, we
can advise what that potential additional cost will be
and what you can do to prepare to dispute
that change, if needed.
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