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What is a Workers’ Compensation Audit?

Workers' Compensation Audit

If you’re just starting out and looking to buy your first worker’s compensation policy, you probably haven’t heard of a workers’ compensation audit. If this is your first renewal, and you just received your first audit, you’re probably scratching your head and asking, “what the heck is this?” Either way, don’t worry – it’s a common thing that businesses with worker’s comp have to complete.

 In a nutshell, a workers’ compensation audit is a review of a business’s workers’ compensation insurance coverage to make sure it’s accurate and up to date. It’s not the most exciting thing in the world, but it’s an important part of your worker’s comp coverage. Look at it this way, it’s a great opportunity for you to make sure you remain in compliance with the law and that the right premium.

Let’s dive in and learn more about what a workers’ compensation audit is all about.

What is worker’s compensation insurance?

Before we get started, let’s first review what worker’s compensation insurance is. Basically, workers’ compensation insurance is a type of insurance that provides benefits to employees who are injured or become ill as a result of their job. This could include things like medical expenses, lost wages, and rehabilitation costs.

The idea behind workers’ compensation insurance is to protect both employees and employers – employees get the coverage they need if something happens while they’re on the job, and employers are protected from lawsuits related to workplace injuries or illnesses. It’s an important business insurance coverage and is required by law in most states if your business has employees. So, paying an accurate premium is important for both the business and the insurance company.

Why are there workers’ compensation audits?

Why do businesses need a workers’ compensation audit? It’s important to understand, workers’ compensation is one of the most regulated lines of insurance. In many states, it’s required that insurance carriers conduct audits. Additionally, when you first purchase work comp, you provide an estimate of the annual payroll. The audit allows you and the carrier to confirm the payroll. Thus, verifying that the premium is correct.

So, you can say, it’s to make sure the workers’ compensation insurance premium is accurate. From the business’s perspective, if you’ve had a reduction in payroll, it’s a way to assure that you aren’t overpaying for coverage. That’s money that could be better spent elsewhere in the business.

So, by undergoing a workers’ compensation audit, businesses can make sure that they’re not over or underpaying for their coverage, and that all parties remain in compliance with the law.

The workers’ compensation audit process

You may have already received your first audit, and now you need to understand what’s expected. Let’s get into the nitty-gritty of the workers’ compensation audit process.

During the audit, the insurance company will review a business’ records at the year’s end to confirm accuracy. They’ll usually request a bunch of information from the business, like payroll records, employee counts, and other data. Once they have all the information they need, they’ll review it and make any necessary adjustments to the policy.

The whole process usually takes a few weeks to a few months, depending on the size of the business and the complexity of the policy. It’s not the most exciting process in the world, but it’s an important one to make sure businesses are in compliance with the law and paying the proper premium.

What happens after an audit?

The most important outcome of an audit is that the proper premium is charged for the work comp premium. Here are a few different outcomes of an audit:

  • The risk exposure or payroll estimates matched the prior term, and there is no change in premium.
  • It’s determined that your risk exposure or payroll was actually lower, resulting in a lower premium. In this scenario, the insurance carrier would owe a premium refund.
  • At the end of the audit, it is determined that your risk exposure or payroll was underestimated. The result would be an increase and premium and you would owe the insurance carrier the difference in premium.

Under normal circumstances, your payroll and risk exposure estimates are accurate. However, from time to time there are differences. Here are the common reasons why estimates are different from the audit result:

  • Your business is growing and you added new employees. The increase in employee count caused an increase in payroll and the audit resulted in an increase.
  • The business reduced the employee count, resulting in a lower payroll and premium.
  • There were some changes in the nature of your work, resulting in a different classification. This change could result in either an increase or decrease in exposure rating.

If you don’t like surprise changes to your workers’ comp premium, you can update your payroll estimates as changes occur to the business. If you change your estimates as they occur, you can keep the payroll and exposure accurate throughout the year.

How to prepare for a worker’s comp audit

Audits are standard procedure in workers’ comp, but that doesn’t mean they won’t require some effort on your part. So, how can businesses prepare for a workers’ compensation audit? First, it’s important to make sure that all their records are accurate and current. This includes things like payroll records, employee classifications, and insurance policy documents. If you have dedicated human resource staff, it’s also a good idea to designate someone within the business to be in charge of the audit process.

During the audit, businesses should be honest and transparent with the auditor, and be prepared to provide any additional information that’s requested. However, you don’t have to provide any data not requested. Don’t offer up too much info.

Finally, it’s important to avoid common mistakes, like failing to keep accurate records or misclassifying employees. By taking these steps, businesses can help ensure that their workers’ compensation audit goes smoothly and that they’re getting the coverage they need at the correct premium.

The bottom line

We’ve covered a lot of ground here, so let’s wrap things up. Workers’ compensation audits might not be the most exciting thing in the world, but they’re an important part of doing business. By ensuring that their workers’ compensation insurance coverage is accurate and up-to-date, businesses can avoid penalties, lawsuits, and unnecessary expenses.

During the audit process, businesses should be prepared to provide accurate records and information and be honest and transparent with the auditor. And by taking steps to prepare for the audit, businesses can help ensure that everything goes smoothly.

If you have questions about your audit, you can always call your insurance agent. If you don’t have one, contact us, we’re happy to help.

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