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Workers Comp Test Audits – Pain or Preventative Measure

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Workers Comp Test Audits – What Are They – Necessary Evil?

Not too long ago, I had thought that Workers Comp test audits were not necessary and could be viewed as an intrusion on employer insureds’ busy schedules.

pic worker comp test audits tube blue purple
Public Use License – Wiki-Amitchell125

Over time, I have come to realize that workers comp test audits may not be appropriate for every situation.   Many situations have come up in the last few years that have changed my viewpoint to a point.

After speaking with quite a few carrier and independent auditors, their opinions on test audits changed and shaped my view of them to the point where I consider them necessary in some situations and not a necessary evil.

Sending out a person with a completely different title than a premium auditor and retitling the audit as something like a risk analysis still seems an unfair situation.  How can an insured trust their carrier and agent with this when a test premium auditor has a different title completely?

Let us look at a few aspects of test audits including:

  • Definition and Types
  • Rules
  • What is covered
  • Length of time to accomplish
  • Industries
  • Why they can be a way to avoid sticker shock at the final premium audit
  • Maximum per year – opinion

Workers Comp Test Audit Definition

The definition of a workers comp test audit is twofold:

  • State Funds of Workers Comp Test Audits are cash
    Wikimedia Commons – Jericho

    A premium audit during the early part of the policy year, usually with a new insured, often with State Funds or assigned risk policies.  The audit functions to establish the proper classification codes and payroll levels early in the policy year to avoid the sticker shock at the end of the policy term.

  • Each state may audit certain policies at random by requesting them directly from the carrier or by doing an in-person audit at employers (rare).  I am not referring to this type of test audit in this article.  These audits usually allow the Workers Compensation rating bureaus (NCCI, WCIRB) to affirm that the proper classification codes are being used for a certain type of employer or industry.

Workers Comp Policy Audit Rules

Most policies read something like this on the premium audit rules – yes, it is in your policy.   I recommend your read your current policy:

We reserve the right to audit your worker’s compensation policies at a time and place convenient for your company.  We may perform an audit any time the policy is in effect and up to three years after the policy expiration (my quick summary).

What Is Covered In The Audit – Length of Time

The materials that are requested for review may be the same type of information requested at the final premium audit for the policy.   The review is usually shorter in time as your policy just started out with them.  One premium auditor commented at a conference that they like to “get in and get out quickly.”  Follow the previous link for a list of the materials that can be reviewed by the premium auditor.

Type of Industries or Companies

Industries of Workers Comp Test Audits like factories
Wikimedia Commons – Mario Hains

The industries that I have seen test audited the most are:

  • Employment agencies
  • Trucking firms
  • Construction companies
  • Very large corporations
  • Companies in the assigned risk pool 
  • Any company that may have a large amount of premium base

Workers Comp Test Audits = Avoiding Sticker Shock

One of the most devastating developments that may not have been budgeted by the business owner is a huge unexpected premium audit bill at policy expiration.   The workers comp test audits may help to avoid this situation by establishing the workers’ comp premium base at the beginning of the policy, especially in assigned risk pools.

When is the best time to do a test audit?  From the numbers I have seen, 100 days into a policy would be the best time to perform test audits.   That way enough current documentation exists to establish many of the facets of the premium audits.

Maximum Number Per Policy Year

One of the caveats that I pondered as I wrote this article was how many times per year should a carrier be allowed to perform a workers comp test audit.

Each policy is unto itself. I do not want to issue a blanket statement.  However, one test audit and the final premium audit should suffice for almost any employer that the carrier considers as a candidate for a test audit process.

 

©J&L Risk Management Inc Copyright Notice

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James Moore

Raleigh, NC, United States

About The Author...

James founded a Workers’ Compensation consulting firm, J&L Risk Mgmt 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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