Workers Compensation Premium Errors Lead to Bankruptcy: 5 Things to Consider

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To gain a better understanding of the financial consequences these events cause, you need to know what it takes for a business to generate the additional cash flow, and where the money comes from to pay for these unexpected financial losses.

Consider these scenarios and their financial consequences:

Case 1 – Regulatory Action: Consider a Missouri business that failed to secure proper workers compensation coverage. They incur a state imposed penalty of $50,000. This business operates on a profit margin of 20%. The business would have to generate additional gross revenue of $250,000 to cover the financial loss due to the imposed penalty. Of course this does not consider the potential criminal charges which may be levied on the business owner.

Case 2 – Policy Related Issues – Classification Codes: Consider a business owner has secured a workers compensation policy. The agent mistakenly misclassified the business operation using a class code that carried a rate of $14 per 100 of remuneration. The projected rating payroll for this business was determined to be $200,000. The premium calculated out to be $28,000. In fact the proper class code carried a rate of $8 per 100 of remuneration and the correct premium should have been $16,000. The difference in premium was $12,000. Now consider this business operates on a profit margin of 10%. That means this business would have to generate additional gross revenue of $120,000 just to break even on the mistake this misclassification caused.

Case 3 – Policy Related Issued – Audit: Consider this business completed their workers compensation audit. At the time of the audit the auditor discovered an error in the original classification of the business. The correction entailed moving a great deal of the business rating payroll from a class code that carried a rate of $12 per 100 of remuneration to a code that carried a rate of $37 per 100 of rating payroll. The business also had an anticipated growth in work causing a 40% increase in payroll causing their payroll to increase from $300,000 to $420,000. There were no corrections to the original policy during the policy period that would reflect this increase in payroll or change in classification. The premium increased from $36,000 to $155,400 generating an additional premium charge of $119,400. Now consider this business operates on a profit margin of 10%. That means this business would have to generate additional gross revenue of $1,194,000 to recover from the unexpected additional premium charge at audit.

Case 4 – Experience Modification Rate: Consider the example outlined above where the business provided service to manufacturing and industrial clients. Part of the contract they have with their clients is that they must maintain an EMR or 1.0 or below in order to continue work. Because of a misclassification of the business (wrong class codes) and a few claims, the EMR increased to 1.10. They were ordered off the work sites. The business just lost $5,000,000 in contract work.

Case 5 – Subcontractor Issues: Consider the example provided above where the business hired an uninsured subcontractor to help with a job. To recap, the business paid the subcontractor $500,000 and hoped to make a profit of $75,000 off the work. Unknown to the business the subcontractor did not carry workers compensation insurance. At audit the insurance company picked up the additional $500,000 in uninsured subcontract costs and charged that against the business. The additional premium charge was $125,000. Not only did the business lose the $75,000 they thought they would make on the extra work but at a %20 profit margin they would have to generate an additional $625,000 in gross revenue to offset having to pay the $125,000 additional premium.

The First $250 of Each Loss is Excluded in the EMOD Formula

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Any claim of $250 or less will not be considered in the determination of whether the single claim cap of 25 points applies. If an employer has two small claims with values of $500 and $300, the 25 point cap will not apply because both claims will have a Primary Loss value of $250 and $50 respectively. However, if an employer has one claim that meets the Primary Threshold and another claim under $250, the 25 point cap will apply.

EMR Worksheet

  • Small claims with a value of $2,001 or less will no longer be grouped together, but itemized in order to show the $250 deduction on each claim.
  • Actual Excess Losses column will be removed since only the claim value up to the Primary Threshold will impact the calculation.

HOW TO DISPUTE YOUR WORKERS COMPENSATION AUDIT

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Here are a few items you need to know about the audit dispute process. Keep in mind these are only provided to you as a guide. The exact process may differ depending on your insurance carrier or workers compensation providers specific audit dispute requirements.

How can you tell if you need to file a workers compensation audit dispute. Here’s a few things to look for:

  • Your audit clearly includes mistakes made by the auditor or insurance company?
  • The payroll numbers used on your audit do not match those you provided the auditor for the policy period being audited.
  • You received a significant audit bill but any increase in payroll does not seem to justify such a large additional premium bill.
  • Your workers compensation job classifications were changed by the auditor or insurance company.
  • Your experience modification factor is different than the one used on your policy.
  • The auditor has improperly classified you and your employees.
  • You are a contractor who performs different types of work or has crews who fall into different job classifications and the auditor did not allow you to use payroll separation.
  • You have been charged for uninsured subcontractors when you have certificates that show they had coverage.
  • Your insurance company removed or changed policy credits on your audit billing statement.
  • You did not receive copies of the auditors worksheets.
  • The auditor did not complete your audit while on site.
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