The Short Rate Penalty And Premium Audits
The short rate penalty is one of the most severe penalties that your company can receive in Workers Compensation. With a short rate penalty, workers comp carriers accelerate the premiums on a policy beyond a pro rata share of the total annual premium.
I recently had discussions with two of our clients who were switching or wanted to switch to a new carrier for Workers Comp coverage mid-policy.
The short rate penalty was originally designed to keep employers from frequently changing carriers. If the changes were allowed, the E-Mod and basically the entire Workers Comp system would grind to a halt. The paperwork nightmare would be profound.
The disadvantage to the carrier is they could be left holding the bag on bad loss development without ever being able to recover the necessary premiums. The short rate penalty heavily discourages an insured from switching carriers until the policy renewal.
I really do not see this as unfair to employers. There is, however, one area where, in my opinion, short rate penalties should be waived without hesitation. Workers comp premium audits are usually performed on an expiring policy within two months after policy expiration, if not earlier. If your company has already renewed with the same carrier, then you will be in month two or three of your new policy with this Workers Comp carrier.
As your expired and new policy states, the exact premium that you will pay for your policies is not final until an audit is performed on your expiring policy. If you disagree with the way the premium auditor has determined your final premium and want out of your new policy, the short rate penalty will make you end up paying a very steep penalty.
Your company is now stuck with:
- A premium audit with which you vehemently disagree
- The renewal policy where the same issues will raise their ugly head at the next premium audit
- A severe short rate penalty if you want out of the new policy
- No time to find a new policy quickly
- A new carrier will be concerned that you may want to jump ship in the middle of their policy if they provide you with one.
- All parties (premium auditor, carrier, agent, etc.) are all unhappy with your company for wanting to switch mid-policy
- The earlier you cancel – the more pro-rata your company will pay.
- The carrier already has your $ if you paid it all upfront. As I said in this post, you lose leverage when the carrier has your $.
If your company wants to switch carriers early in policy, your company will pay a hefty fee – up to 90% in certain states for extremely early policy cancellations.
How do you avoid this situation? Check back here tomorrow for more on the short rate penalty.
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