Your premium is calculated by multiplying your rate by your payroll and dividing it by 100. For instance, if your payroll is $200, 000 and the rate is $.05, your premium wil be $1, 000.
(200, 000X0.5)÷100= $1, 000
The amount you pay in premiums is just an estimate based on your projected payrolls. The insurance auditor performs audits every year to verify actual payrolls for the year and adjust your premium accordingly. Your insurer may bill you an additional premium if your payroll is more than your estimated one. You might receive a return premium if your payroll is less than the projected one.
Why an Audit is Necessary
The purpose of performing a workers compensation audit is to:
- Verify the accuracy of the payrolls used for rating
- Verify the classification of employers is accurate
- Verify the accuracy of premiums employers pay for their workers reflects the risk.
If an audit is not conducted on a regular basis, the employer might end up paying too much or too little for workers compensation insurance. In addition to insurers conducting their own audits, state insurance departments periodically conduct their own audits to ensure the insurers are doing a good job.
Workers compensation policies obligate employers to allow an insurer to audit their policy. The insurer can audit all records related to the policy including payroll records, tax returns and accounting ledgers.
The policies also contain clauses that give insurers the right to inspect your workplace. At any time to collect payroll and to assess the insurability of your business.the inspections are not meant to assess workplace safety.
Failure to comply with the inspection and audit provisions in your policy will result in the insurer refusing to renew your policy or canceling it all together.
Types of Audits
There are different types of audits:
Test audits are meant to ensure that the rating and classification system is being used properly. They are also meant to verify that insurers are only using rating plans approved by the state bureau.
If you have started a new operation or your business has changed in some way, and interim audit might be necessary. If you want to report your payroll more than once a year you may also use the interim audit.
These are physical audits conducted at the workplace and they are used to collect information such as payroll in order to calculate how much premium you should pay for your policy.
Some insurers can conduct telephone audits. The insurer will send to you a form to fill out and return to them. Once they’ve received the information, they will connect you to an auditor who will discuss with you the information that you filled out in your form.
This is an audit conducted when you first sign with a new insurer. They are usually conducted at your workplace to ensure the correct payroll and classification is used.
This type of audit is suitable for small employers who do not generate a lot of premium. It might, however, not be available for employers in certain occupations such as roofing.
Fraud by an Employer
Apart from being obligated to comply with your workers insurer’s request, you have to give them accurate data. If you provide inaccurate data, you might be prosecuted for insurance fraud. Scenarios where you might be prosecuted for fraud include:
- Giving subcontractors fake certificates of insurance
- Hiding the fact that you have subcontractors under your payroll
- Providing fake financial reports like phony tax returns
- Giving an insurance auditor false job descriptions
- Attempting to reduce your payroll by underreporting your payroll
You might not always agree with your insurer. Your report might show classification of changes you do not agree with or incorrect payroll figures. Always contact your insurer immediately if you don’t like the results of an audit.
Consult a Workers Compensation Lawyer
Do you have questions about your current workers compensation policy? Are you following up on a workers compensation claim for one of your employees? We can advise you the way forward. Our workers compensation lawyer in Providence, RI are willing to help. Contact us at 401-751-0101 for a free initial consultation.