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Workers Compensation Classification Code Check Up

   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 classifi
cation 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.)

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.


If you are unfamiliar with Workers Compensation insurance, it can be a good idea to review the Basics of how Workers Comp insurance premiums are calculated. And you may want to study our Online Guide for more detailed information on elements of Workers Compensation premiums, such as classifications and experience modification factors. Also, remember that the rules that govern Workers Comp premium can vary from state to state.



Please email: or call us at 800-288-9256 with questions on audits, classifications, experience modifiers, or other aspects of Workers Comp premiums and audits.

We've been helping employers since 1987, making Advanced Insurance Management one of the oldest and most experienced firms in the field of premium consultants.

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