The Premium Audit

If you were to read the entire Workers Compensation Manual from cover to cover, you would come away with the impression that an insurer has almost total discretion deciding how much to charge for Workers Compensation insurance. But after you have read this section, we hope you come away with a somewhat different impression. Your greatest chance of paying the absolute minimum for this insurance is determined by how well you prepare for the payroll audit.

When your insurance policy went into effect, your premium was based on classifications, estimated payrolls (referred to as remuneration) an experience modification, and possibly an ARAP (a state-specific surcharge). After the policy expired the insurer conducted a payroll audit that converted estimated payrolls into actual payrolls and assigned classifications to those payrolls.

Premium auditors, like all insurance company personnel, are driven by two opposing goals. The first is to maximize your premium. Some examples of maximizing premiums are

Opposing the effort to maximize premium is the desire to push work across their desks as quickly as possible. At most insurance companies, when an auditor receives your file, the clock starts ticking.

Typically, insurers require that 70% - 80% of all audits be completed within 30 days from the date they were assigned to an auditor. Those that are not completed within this time frame are labeled as "delinquent." An auditor's job performance is measured as much by his "delinquent list" as by the quality of his work.

Knowing the time constraints under which the auditor works can be helpful. We have found that efforts to speed the auditor on his way can be rewarded by more favorable results. When you are elusive or provide the auditor with poor records, the result will be less favorable. Deductions such as officer wages in excess of state maximums, overtime deductions, expense reductions against commissions, and minimized or eliminated sub contractor charges may be "overlooked".

But do not confuse good records with too much information. The cardinal rule of the audit is to VOLUNTEER NOTHING. Instead, listen to what information the auditor requests, compile that data and nothing else, and present it. No more, no less. He or she is entitled to look at any other records he needs to feel comfortable with the information that you have provided. You are entitled to know why he needs what he requests.

Payroll audits are just that, an audit of payroll. We suggest that you avoid volunteering cash disbursements, check registers, and similar records. While insurers have the right to inspect all records that relate to the policy, just how far that right extends is subject to interpretation.

How should you prepare for an audit? We suggest that you make your own 'pre-audit'. By compiling the required information and then presenting it in a familiar format, you will:

While some insurance companies have their own unique format for audits, most have adopted a standardized format that you can use. What is important to remember is that the more detail you provide to support your audit, the better. (Do not confuse detail with unnecessary information). Detail not only makes your data more credible, it makes the auditor look better in the eyes of his or her supervisor. For example, your own audit should list monthly totals instead of annual totals, show individual names and their wages instead of entire department totals, and separate overtime with as much detail and precision as possible.

Many auditors will even accept your own well documented audit without further probing or questions. As a further inducement, you might prepare your work on a spreadsheet. Most insurance carriers have standardized on software and if you hand over a diskette with the completed audit, you can save the auditor and yourself much time.

WHO SHOULD SPEAK WITH THE AUDITOR

Typically the auditor gathers his data from the person within an organization with responsibility for payrolls. Often this is the company bookkeeper, controller, or Human Resources Manager. It is important that whomever has contact with an auditor be aware of the cost to your organization of Workers Compensation. Ideally, that person should have read this web page before speaking with the auditor.

In far too many instances, auditors are given information that is superfluous. You should answer his questions only as they relate to the matter at hand, and nothing else. Make sure that whoever in your organization deals with the auditor is aware of these goals.

Because of the time constraints that auditors work under, many prefer to gather the raw data at your business and finish their work at another time and place. When this happens, you will not know what assumptions have been made or the results until you receive a final invoice. Then it may be too late. Never sign an auditor's worksheet until it is complete and you have had a chance to discuss the assumptions it contains. Insist that the audit be completed at your office. Signing an incomplete worksheet is like signing a blank check. Always ask for a copy of the worksheet for your own records. It is your roadmap to your workers comp premium.