Becoming An Insurance Auditor: Steps To Success

A workers' compensation insurance auditor is responsible for conducting an end-of-year review of a company's records to ensure that the business has paid the correct premium for workers' compensation insurance. This process is mandated by law and is required by most states to ensure businesses are paying the right amount for their coverage. The auditor verifies the payroll and other records quoted at the beginning of the policy, reflecting the actual payroll and scope of work performed during the policy period. If the records don't match, the price of the insurance is adjusted. The auditor also assesses whether subcontractors hired by the company had their own coverage. To become a workers' compensation insurance auditor, one must be knowledgeable about insurance policies, payroll processes, and state regulations regarding workers' compensation. They should also have strong analytical and communication skills to review and discuss financial records with businesses.

Understand the purpose of a workers' compensation insurance audit

Workers' compensation insurance is designed to protect businesses and their employees from the expenses resulting from workplace injuries. It covers employees' medical expenses and lost wages when they suffer a work-related illness or injury. It also covers the legal costs involved when a worker gets injured.

A workers' compensation insurance audit is an annual review of records conducted at the request of an insurance company. It is a necessary and mandatory part of the insurance process to generate the final premium and ensure the business has the right coverage. It is usually done at the end of the year and may be conducted by mail, phone, or in person, depending on the auditor and the business type.

During the audit, the insurance provider verifies that the payroll and other records quoted at the beginning of the policy reflect the actual payroll and scope of work performed during the policy period. The audit also assesses whether any subcontractors hired had their own coverage in place. If not, the business may be charged based on payments to uninsured subcontractors.

The purpose of a workers' compensation insurance audit is to ensure that the business has paid the correct premium for workers' compensation insurance. It helps make sure that the business is paying the right amount for the right coverage. The audit also ensures that the business's coverage and premium match, so the business is not paying too much for its workers' compensation coverage.

Additionally, workers' compensation premiums are partly based on the amount of compensation paid to employees over a policy term, including money and benefits. The insurance premium also depends on job classifications, which help show the amount of risk workers face. Therefore, the audit verifies the estimated payroll and confirms that the business's job duties and roles have not changed.

Most states require insurance companies to audit a majority, if not all, of their policies. Even if a policy expires, the insurance carrier still has the right to audit the business.

Know the different types of audit: mail, phone, and physical

A workers' compensation insurance audit may be done by mail, phone, or physical/in-person audit, depending on the auditor and the business type.

Mail Audit

A voluntary workers' compensation audit is done by mail. The insurance company will mail the audit form within 60 days after the policy expiration. The form will show the classification codes and ask the policyholder to verify the actual payroll exposures for each class. The form may also request that the policyholder return other tax reports or related documents.

Phone Audit

Phone audits are done remotely. Once the policyholder sends the requested information, the auditor will schedule the phone audit.

Physical/In-Person Audit

A physical audit is performed at the place of business. The auditor will notify the policyholder by mail or phone and schedule the audit appointment, usually within 60 days after the policy expiration. The auditor will have a time schedule, and most insurance carriers require them to complete the audit within 30 days.

Learn how to prepare for an audit

Preparing for a workers' compensation audit can be a daunting process, but being well-prepared will make things easier for both you and the auditor. Here are some steps you can take to get ready for the audit:

Gather your records

The auditor will need to examine your financial data for the policy period. The specific documents and records may vary depending on your provider and the auditor, but it's a good idea to have the following readily available:

• Description of company operations
• Detailed job descriptions for each employee, including their duties and risk levels
• Number of employees at each location
• Owners/officers' names and titles
• Description of contractor/subcontractor work
• Payroll journal or register
• State unemployment insurance tax reports (these forms vary by state)
• Number of hours, days, and weeks worked annually
• Salaries, wages, and commissions
• Cash disbursement records
• Payments made to independent contractors, subcontractors, and casual labourers
• Receipts for materials purchased
• Certificates of workers' compensation coverage for subcontractors

Keep all your records organised. For example, put all your payroll records together in one place, and keep all subcontractor-related information, such as payment amounts and insurance certificates, together in another.

Update your job descriptions

Your workers' compensation costs are calculated based on your payroll and the risk your employees face on the job. The auditor will confirm your business operations and everyone's duties to ensure your estimates of risk match the actual level of risk. Update your job descriptions to be more detailed, or create them if you haven't already.

Make the auditing process easier

Be prepared with complete and accurate records to make the process smoother. Only provide what the auditor asks for – volunteering more or less information than required will make the process harder for both parties. Ensure that an owner or employee who is familiar with the company's administrative practices is available to speak to the auditor.

Engage with the auditor throughout the process and review any documents they prepare. Don't sign off on anything you don't understand, and ask questions about anything that doesn't make sense to you.

Understand the consequences of ignoring an audit

Ignoring a workers' compensation audit can lead to substantial financial repercussions and severe penalties for your business. Here are some of the potential consequences:

• Non-compliance charge: Failure to comply with the audit process can result in a significant non-compliance charge, leading to a drastic increase in the audit bill—often 25% to 50% of the original policy premium, and potentially reaching up to 200%.
• Cancellation of policy coverage: The insurance company may decide to cancel your current workers' compensation policy, even if you pay the non-compliance charge.
• Involvement of collections agency: If the outstanding bill remains unpaid, it will typically be sent to a collections agency, impacting your ability to obtain insurance elsewhere. The collection agency will inform any new insurance provider of the unpaid premium, leading to the likely cancellation of the new policy.
• Inability to acquire future insurance coverage: Neglecting to participate in a workers' compensation audit violates the conditions of your agreement with your insurance provider and can make it difficult to acquire insurance coverage in the future.
• Incorrect premiums: By ignoring the audit, you may end up paying premiums based on incorrect estimates, which can result in overpayment or underpayment. Audits help ensure that premiums are adjusted based on accurate and up-to-date information.
• Disruption to business operations: Non-compliance with the audit process can result in unexpected costs and disruptions to your business operations, as you may be charged for payments to uninsured subcontractors listed on your policy.

Given these potential consequences, it is crucial to respond to any audit inquiry and prepare for it accordingly. Complying with the audit is in your best interest, as the results can often work in your favour, leading to fairer and more accurate premiums.

Know how to dispute an audit

It is not uncommon to receive a shockingly high audit bill for a recently expired Workers' Compensation insurance policy. However, it is possible to dispute your Workers' Comp premium audit charges and win. Here are the steps to follow:

• Understand the causes of the premium increase: Refresh yourself with the basics of how Workers' Comp premiums are calculated. Examine how the estimated premium on the original policy was calculated, including the classification codes used and the payroll assigned to each classification.
• Compare the original policy with the audit billing statement: If a more expensive classification is used on the audit that was not on the original policy, this may be an error. Also, compare the estimated payrolls on the original policy with the payrolls used on the audit. If payroll has increased, review how the auditor determined the increase.
• Examine the documents used by the auditor: Check if the auditor had to make any assumptions due to the unavailability of certain documents. Ensure that adjustments have been made to exclude the premium portion of overtime pay, if applicable. Review how the auditor allocated payroll among different classification codes and whether the nature of the work done by some employees was misunderstood, leading to incorrect classification and manual rate application.
• Check for charges related to uninsured subcontractors or independent contractors: Insurers are paying more attention to this aspect, as uninsured subcontractors can file claims under your policy in most states. Determine if you have or can obtain certificates of insurance from these subcontractors.
• Compare the experience modification factor: Most states prohibit increasing the modifier late in the policy term. If the modifier is higher on the audit than on the policy, it may be a reversible error.
• Communicate identified errors to the insurance company: Once you have pinpointed what you believe are errors in the audit, communicate these in writing to the insurance company's audit department. If you are not satisfied with their response, you may contact your state's department of insurance for assistance or appeal through the rating bureau appeal process in your state. Remember that Workers' Compensation insurance is regulated by state government agencies, so the specific process may vary.
• Seek external assistance if needed: If the dispute is not resolved and the additional premium sought is large, the insurance company may threaten legal action. In such cases, consider seeking legal advice or consulting specialists such as Advanced Insurance Management consultants, who have experience in correcting premium errors and assisting with audit disputes.

Frequently asked questions