Post Audit Policy Switch Can Be A Disaster If Knee Jerk Reaction
A post audit policy switch may not be a good idea in most cases. The penalty incurred may be significant.
I received this question over the holiday weekend. Our recent premium audit by the Workers Comp auditor indicated that we owed an additional 31% on our policy that expired two months ago. We switched policies to another insurance carrier two months into the next policy. We now received another large bill on top of the premium audit bill. Why?
Some of the largest unexpected policy bills occur when an employer switched mid-policy term to another policy. This is known as the short rate penalty. There is a somewhat complicated calculation of the penalty. The short rate penalty can be substantial. This is very true when the policy is switched after six months.
The short rate penalty is the insurance carrier’s way of making sure that an employer does not keep switching carriers if they have a large or numerous claims. The carrier has to have some way to charge premium for the claims even though they no longer are the carrier on the policy.
Even though you had no bad claims experience, the insurance carrier will still charge your company for the short rate penalty. One suggestion would have been previous to switching policies to review the 31% premium audit increase and dispute any substantiated overcharges.
The 31% increase may also be incurred when the premium auditor for the new carrier reviews the new WC policy after expiration. The new lower quote for your policy may not have taken into account the situation that increased your old policy.
The other function of the short rate penalty is to keep employers from switching policies many times during the policy year after bad claims experience. Switching policies will temporarily also affect your E-Mod. Your E-Mod may not have reflected your recent claims experience.
Your old and new carrier will report your claims to the respective insurance rating bureau (NCCI or WCIRB). Switching policies midterm will not avoid the claims appearing in your Mod calculations.
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