Perils of Pandemic Premium Audits

Because workers compensation premiums are usually driven by employer payroll, insurers audit the payroll figures to ensure the worker classifications are accurate and that the premiums reflect the covered risks. States and the rating bureaus have stringent rules around what counts as payroll and how to calculate premiums.

Regulators also audit insurers to ensure their premium calculations are consistent and accurate. Every insurer is held to the same standard to create a fair and competitive market.

The premium audit process can be very contentious because it is labor-intensive, and no one wants to be told they owe an additional premium on an expired policy. However, every workers compensation policy has this as a condition of the coverage.

Many do not realize that the leading cause of workers compensation fraud is related to payroll reporting. Some companies will try to lower their premiums by intentionally reporting lower payroll figures by misclassifying workers. They classify them as either independent contractors or positions with lower premiums (e.g., reporting foundry workers as "clerical"). Sometimes, these companies will simply report a lower payroll than was paid.

All of this complexity and controversy relating to workers compensation premium audits existed long before COVID-19. However, the pandemic made things much worse. Many states issued emergency rules requiring immediate premium audits with the thought that this would bring premium relief to troubled businesses. However, these rules mostly created confusion and added high administrative costs to both businesses and insurers. No one was prepared for the massive data collection and analysis effort that the states mandated.

While there is significant state variation in the emergency rules, here are some examples that help explain what insurers, brokers, and businesses are dealing with while trying to manage their businesses during a global pandemic.

• It does not matter if you are self-insured and rarely report data to the bureaus. The states have imposed data reporting requirements on insurers and businesses relating to COVID-19. The orders apply to all workers compensation coverage: first dollar, deductible, and self-insurance.
• Furlough pay is complicated. Furloughed payroll may be excluded from premium calculations where the state has approved this exclusion and if the employees meet the definition of a furloughed worker. These definitions vary by state.
• If an employee is on leave due to COVID-19 (either diagnosis or quarantine), that time off may be classified differently than someone on leave due to another illness.
• It could result in a workers compensation claim if an employee's COVID-19-related leave is due to exposure while on the job.
• Employers with temporarily reassigned workers may have premiums adjusted based on new classifications. Again, there are significant state variations on this. Essentially, this makes employers and insurers look at payroll week to week instead of once at the end of the policy term. It is an extremely labor-intensive process for everyone involved.
• Employers are expected to maintain extensive records on furlough pay and other variations, which must be reported to the insurers and, ultimately, the states.
• It is important to understand the difference between severance and furlough. Furlough is temporary, and you plan on bringing them back.
• Every workers compensation policy has a minimum premium, and these still apply. Some insurers have decreased these premiums to accommodate current circumstances, but not all have adjusted.
• Self-insured employers are expected to comply with the state rules in monopolistic states such as Washington and Ohio.
• It cannot be stressed enough that there are many variations by state. Even all of the National Council on Compensation Insurance states are not operating under the same rules.

Are you confused by all of the complexities? Don't worry. You are certainly not alone. Chances are, there will be more emergency rules issued soon to add to the confusion. The best advice right now is to document everything and be patient. The insurers didn't make these rules; the states did. Insurers, brokers, and businesses need to work together to satisfy these extensive state reporting requirements.