Workers Comp Test Audits – What Are They – Necessary Evil?

Not too long ago, I had thought that Workers Comp test audits were not necessary and could be viewed as an intrusion on employer insureds' busy schedules.

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Over time, I have come to realize that workers comp test audits may not be appropriate for every situation. Many situations have come up in the last few years that have changed my viewpoint to a point.

After speaking with quite a few carrier and independent auditors, their opinions on test audits changed and shaped my view of them to the point where I consider them necessary in some situations and not a necessary evil.

Sending out a person with a completely different title than a premium auditor and retitling the audit as something like a risk analysis still seems an unfair situation. How can an insured trust their carrier and agent with this when a test premium auditor has a different title completely?

Let us look at a few aspects of test audits including:

• Definition and Types
• Rules
• What is covered
• Length of time to accomplish
• Industries
• Why they can be a way to avoid sticker shock at the final premium audit
• Maximum per year – opinion

Workers Comp Test Audit Definition

The definition of a workers comp test audit is twofold:

• A premium audit during the early part of the policy year, usually with a new insured, often with State Funds or assigned risk policies. The audit functions to establish the proper classification codes and payroll levels early in the policy year to avoid the sticker shock at the end of the policy term.
• Each state may audit certain policies at random by requesting them directly from the carrier or by doing an in-person audit at employers (rare). I am not referring to this type of test audit in this article. These audits usually allow the Workers Compensation rating bureaus (NCCI, WCIRB) to affirm that the proper classification codes are being used for a certain type of employer or industry.

Workers Comp Policy Audit Rules

Most policies read something like this on the premium audit rules – yes, it is in your policy. I recommend your read your current policy:

We reserve the right to audit your worker's compensation policies at a time and place convenient for your company. We may perform an audit any time the policy is in effect and up to three years after the policy expiration (my quick summary).

What Is Covered In The Audit – Length of Time

The materials that are requested for review may be the same type of information requested at the final premium audit for the policy. The review is usually shorter in time as your policy just started out with them. One premium auditor commented at a conference that they like to “get in and get out quickly.” Follow the previous link for a list of the materials that can be reviewed by the premium auditor.

Type of Industries or Companies

The industries that I have seen test audited the most are:

• Employment agencies
• Trucking firms
• Construction companies
• Very large corporations
• Companies in the assigned risk pool
• Any company that may have a large amount of premium base

Workers Comp Test Audits = Avoiding Sticker Shock

One of the most devastating developments that may not have been budgeted by the business owner is a huge unexpected premium audit bill at policy expiration. The workers comp test audits may help to avoid this situation by establishing the workers' comp premium base at the beginning of the policy, especially in assigned risk pools.

When is the best time to do a test audit? From the numbers I have seen, 100 days into a policy would be the best time to perform test audits. That way enough current documentation exists to establish many of the facets of the premium audits.

Maximum Number Per Policy Year

One of the caveats that I pondered as I wrote this article was how many times per year should a carrier be allowed to perform a workers comp test audit.

Each policy is unto itself. I do not want to issue a blanket statement. However, one test audit and the final premium audit should suffice for almost any employer that the carrier considers as a candidate for a test audit process.

This blog post is provided by James Moore, AIC, MBA, ChFC, ARM, and is republished with permission from J&L Risk Management Consultants. Visit the full website at www.cutcompcosts.com.

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