Workers Compensation – Examining the Proposed Cost

Often times I encounter insureds who just had a Workers’ Comp audit and are very upset or while purchasing coverage, they are attracted to the seemingly low upfront cost; which mean in a years time they will be upset about their audit!  The disappointment and misguided attraction to the wrong policies stem from a lack of understanding as to how Workers’ Comp Policies work, below is a brief explanation.

Workers’ Comp pricing is developed as follows…

• Annualized Employee Payroll gets designated into appropriate Class Codes
• Categorized Payroll is multiplied by rate (per $100 of payroll as defined by the State)

Seems relatively simple; except that at policy inception, no one can accurately predict what their upcoming payroll will be for the next year.  Therefore estimates as to payroll by work classification are made and at year end, a Carrier audit is conducted to true up if one paid enough for the coverage provided.  If you estimated beyond the actual audited exposure, you get a credit, conversely, there is an additional premium due to the carrier.

The pitfalls presented at point of purchase are as follows…

• Misclassification – Many times, proposals are presented that present the payroll in the wrong classification artificially lowering the deposit premium.  Upon audit; however, the Carrier will audit and find out, so be sure you have the NCCI approved class codes for your employees work classification.
• Underestimating Payroll – Many proposals grossly underestimate payroll.  This once again artificially lowers the deposit premium which will be corrected upon audit.
• Payroll Reporting – Many payroll companies sell their payroll customers on a compelling offer.  They sell you the Workers’ Comp and notify the carrier on a payroll reporting basis of EXACTLY how much  your payroll is thereby eliminating audits.  This is FALSE.  While this can be a great tool, the Carrier still has the right to Audit.  Further, many payroll companies have been known to misclassify employees; so while the gross payroll number is correct, the rates are not and are charged upon audit.

If you are seeking a “cheap deal”, take it.  If you are looking for peace of mind that you are insured correctly without the worry of costly unexpected audits, give us a call at (561) 287-6279