Advice for insurance agents to get customers ready for a workers’ compensation (WC) audit

As a commercial insurance agent, you and the small business owners you serve are constantly preparing for renewals. It is important to remember that a workers’ compensation audit is an important part of the renewal process. The audit happens 30-60 days after the policy term ends. It ensures that your customers have paid the correct amount for WC insurance in the previous policy term year and are on track to pay the correct amount for the upcoming year.

The workers’ compensation audit can be hassle-free and stress-free for your small and mid-sized business (SMB) customers, assuming they are prepared and have kept detailed, organized, and truthful records.

Although people often associate audits with suspicious activity or potentially negative repercussions, that is not true for workers’ compensation audits. WC audits are mandated by law and are beneficial for SMB owners. 

Every business must undergo a workers’ compensation audit to assess and identify any year-over-year changes in its number of employees, employee cost, and class codes estimated at the beginning of the policy. Carriers might also inquire if any hired subcontractors had their own insurance. The audit helps confirm appropriate past and future pricing based on the information collected. 

We recently hosted a Bold Penguin “Coffee with Carlos” webinar and sat down with a member of the biBERK auditing team to discuss a few ways to prepare yourself and your customers for audit season. We’ve included some of their tips and videos below. 

Use marketing platforms to review why a workers’ compensation audit is necessary

Stay ahead of the process. Prepare and inform your customers through marketing platforms like phone calls, emails, newsletters, or social posts to let them know that the workers’ compensation audit is coming and why it is needed. 

This is a great time to remind your customers that the biggest factor in a workers’ compensation premium is payroll. When they applied for workers’ compensation coverage, the business owner estimated total payroll costs for the upcoming year and the type of job for each employee. But that was just an estimate. An end-of-year audit is necessary to compare the payroll and risk estimated at the beginning of the year to the actual payroll and risk documented at the end of the year. Give them a heads-up that the carrier will then adjust the policy premium accordingly. This audit happens even if they canceled the policy early. 

It’s normal for businesses to gain or lose employees over the course of 12 months. The workers’ compensation carrier just needs to be informed of those changes. Here’s an example:

A new customer started a snow removal business earlier this year and needed WC insurance. When the policy was bound, the estimated payroll was approximately $150,000. The premium paid this year was based on that estimate. However, there wasn’t as much snow as anticipated this year, and so the payroll was actually closer to $100,000. The workers’ compensation audit will find this discrepancy between the estimate and the actual amounts. Because the customer overpaid for workers’ compensation this year, he will receive a refund check. However, next year, the estimate might be too low, so make sure to explain to your customer that if the payroll increases, he will need to pay extra at the end of the next year.

Remind customers to be on the lookout for audit information

The carrier through which the policy was bound will inform the business that it’s time for the annual workers’ compensation audit and will usually work with a third party to conduct the audit. Who reaches out (and how) varies according to the insurance carrier. There are different types of workers’ comp audits they should be on the lookout for: 

• Email/mail (remind them to have a current mailing address on file).
• Phone.
• Virtual platforms like Zoom. 
• Physical audits.
  

For businesses with smaller payroll costs, it will likely be via mail or email to the contact address listed on the policy. Each workers’ compensation audit will require paperwork to be completed and submitted. You’ll want to advise your customers to respond to the WC audit inquiry request promptly.

Give them a checklist of items to prepare

The workers’ compensation audit process will be noticeably easier and less daunting if your customers are prepared. They should keep detailed, organized, and easily accessible records, not just in audit season but throughout the year. Here are several customer advice ideas:

• Establish a “point person” to gather and send the information. 
• Gather detailed employee pay records with corresponding job classifications. The audit might ask for hours worked, overtime hours, bonuses, commissions, changes in status, etc. Relevant tax documents will support the pay records. 
• Request current certificates of insurance from subcontractors (if applicable).
• Conduct an internal review of records prior to the workers’ compensation audit to identify any potential issues and address them beforehand. 
• Develop a system if there is not one in place to consistently collect and maintain all relevant payroll and employee information throughout next year. 
• Discuss putting yourself, as the agent, as a contact person on the policy.
• Explain a few key concepts, such as owner inclusions in the WC application and the difference between subcontractors and independent contractors.  
• Remind them it’s a good idea to make a copy of all submitted paperwork.

Please be advised that criteria and information required, such as owner inclusions, might vary by state, so it’s important to review that with the customer as well. 

Pro tip: 

“Coffee with Carlos” offered a great breakdown of the differences between subcontractors and independent contractors. 

Click below to view a sample list of informational items that will need to be shared, provided by biBERK.

Share the consequences of ignoring a workers’ compensation audit

A workers’ compensation audit is incorporated into the agreement between the policyholder and the insurance company when the policy is bound. That means neglecting to participate in a WC audit would violate the conditions of the agreement. Here are a few reasons why your customers should not violate that agreement:

• To avoid cancellation of the policy.
• To avoid additional charges, (e.g., carriers might estimate too much for a premium change, charge a non-compliance fee, etc.). 
• To avoid the business being sent to collections or avoid state penalties or fines.
• To ensure future ability to acquire WC coverage.

Pro tip: 

Here is a deeper dive into the steps that might happen if your customer ignores a workers’ compensation audit initiated by biBERK (or another carrier). 

Tell them what to expect once the audit is complete

The carrier will inform your customer of any changes once the workers’ compensation audit is complete. The findings will determine how much they will pay next year. Let them know that disputes on an audit should be directed to the carrier first. If the rates increase, this is a great time to search for a few quotes to make sure your customers are getting the best rate possible.

Why the workers’ compensation audit matters

WC insurance and the required annual workers’ compensation audit are critical pieces of a coverage solution that can’t be ignored. Great communication, preparedness, and staying abreast on evolving workers' compensation trends will help you protect your clients, provide them peace of mind, and increase financial stability.

Contact Us to learn more.