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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.

Calculate Short Rate Penalty the insurance planning
Wikimedia commons – Steve Buissinne

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.

Picture Woman Using Laptop Short Rate Penalty Close Up

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.

Related: Short Rate Penalty Expensive Choice To Change Policies Mid-Term

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James J Moore - Workers Comp Expert

Raleigh, NC, United States

About The Author...

James founded a Workers’ Compensation consulting firm, J&L Risk Management Consultants, Inc. in 1996. J&L’s mission is to reduce our clients’ Workers Compensation premiums by using time-tested techniques. J&L’s claims, premium, reserve and Experience Mod reviews have saved employers over $9.8 million in earned premiums over the last three years. J&L has saved numerous companies from bankruptcy proceedings as a result of insurance overpayments.

James has over 27 years of experience in insurance claims, audit, and underwriting, specializing in Workers’ Compensation. He has supervised, and managed the administration of Workers’ Compensation claims, and underwriting in over 45 states. His professional experience includes being the Director of Risk Management for the North Carolina School Boards Association. He created a very successful Workers’ Compensation Injury Rehabilitation Unit for school personnel.

James’s educational background, which centered on computer technology, culminated in earning a Masters of Business Administration (MBA); an Associate in Claims designation (AIC); and an Associate in Risk Management designation (ARM). He is a Chartered Financial Consultant (ChFC) and a licensed financial advisor. The NC Department of Insurance has certified him as an insurance instructor. He also possesses a Bachelors’ Degree in Actuarial Science.

LexisNexis has twice recognized his blog as one of the Top 25 Blogs on Workers’ Compensation. J&L has been listed in AM Best’s Preferred Providers Directory for Insurance Experts – Workers Compensation for over eight years. He recently won the prestigious Baucom Shine Lifetime Achievement Award for his volunteer contributions to the area of risk management and safety. James was recently named as an instructor for the prestigious Insurance Academy.

James is on the Board of Directors and Treasurer of the North Carolina Mid-State Safety Council. He has published two manuals on Workers’ Compensation and three different claims processing manuals. He has also written and has been quoted in numerous articles on reducing Workers’ Compensation costs for public and private employers. James publishes a weekly newsletter with 7,000 readers.

He currently possess press credentials and am invited to various national Workers Compensation conferences as a reporter.

James’s articles or interviews on Workers’ Compensation have appeared in the following publications or websites:

  • Risk and Insurance Management Society (RIMS)
  • Entrepreneur Magazine
  • Bloomberg Business News
  • WorkCompCentral.com
  • Claims Magazine
  • Risk & Insurance Magazine
  • Insurance Journal
  • Workers Compensation.com
  • LinkedIn, Twitter, Facebook and other social media sites
  • Various trade publications


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