I've been noticing a pattern in recent years, in the regular inflow of small business owners reaching out to me regarding what I call "Shock Audits" for Workers Compensation insurance. And this pattern is consistent with something I've long suspected, based on my many year's experience with Workers Compensation insurance (I started working with Workers Comp insurance back in 1978, for those keeping score at home. But that's A.D. not B.C.)
The pattern is that minority-owned businesses are a disproportionately large portion of the employers who reach out for help. Now, my clients over the years have included all types of businesses, and all sizes, all over the U.S. So it's not that minority owner businesses have a monopoly on this problem. But, boy, they sure do seem to be over-represented among the folks who call or email us, looking for help.
I've long suspected that this might be the case, for a number of reasons. A lot of these minority businesses tend to be smaller enterprises. And an awful lot of smaller businesses end up in the Assigned Risk programs for Workers Comp insurance. And that, I think, increases the odds of a Shock Audit.
A Shock Audit, for those just joining us, is a situation where an employer buys a Workers Comp insurance policy for a relatively modest initial premium--say, $1,500.00. But then, after the policy has ended (sometimes a couple of years after the policy has ended) said employer gets a bill from the insurance company for $10,000.00. Or $20,000.00. Or maybe $100,000.00.
And if the employer doesn't pay that Shock Audit, the insurer company typically files suit for that shockingly large audit bill.
Now, it could be argued that I shouldn't complain overmuch about this state of affairs. After all, I do a lot of work as an expert witness in such litigation, often (but not always) retained by the policyholder to dispute the amount sought by the insurance company. And it's not just litigation cases that butter my professional bread--I also do a lot of work helping policyholders dispute audits via the various administrative remedies available, in cases where litigation has not yet been initiated by the insurer.
I often like to say that, in a perfect world, I should have to do something else for a living, as there really shouldn't be so many instances where someone with my particular experience and skill set is needed.
But alas, we do not live in a perfect world.
But back to minority-owned businesses. Because so many of them are insured through Assigned Risk plans, I believe that these businesses tend to receive less insurance-related counsel and advice from those selling that insurance. For a variety of understandable reasons.
Assigned Risk Workers Comp policies pay relatively low commissions. That means that insurance agents find it hard to justify spending inordinate amounts of time advising such clients. And keep in mind, unlike, say, an attorney or a CPA, insurance agents have a relatively low bar to clear in regards to meeting their professional responsibilities.
In general, an insurance agent only needs to obtain the insurance requested, or explain that he or she could not obtain it, and not steal the client's money, in order to meet the default setting of professional liability. Of course, if the insurance agent voluntarily begins to offer professional advice, a higher level of professional duty may be created, but that's essentially a voluntary election by an insurance producer.
So for Assigned Risk business, as long as the insurance agent obtains the requested Workers Compensation insurance and doesn't steal money paid by the customer, the agent has likely satisfied any professional duty--as long as that agent doesn't start offering professional advice.
Please keep in mind that these are generalities. Each and every case depends heavily on the particular facts and details of that case, including potential state-specific statutes and regulations, as Workers Compensation insurance is a state-by-state matter, generally.
But in general, an insurance agent isn't commonly an expert in premium auditing, anyway. The training and expertise of insurance premium auditors involves technical matters that licensed insurance agents are not required to possess. So the bottom line is that businesses that purchase Workers Comp insurance through an Assigned Risk program typically, in my experience, receive an even lower level of professional advice from the insurance producer than those who get coverage through the so-called "voluntary market".
And even in the voluntary market, the expertise of insurance agents in regards premium audits is commonly limited. There are, of course, some who develop and offer significant expertise in these matters, for their clients. But such insurance producers are not, in my experience, your average insurance agent. And that goes double, I suspect, for those who write large amounts of Assigned Risk business.
And insurance companies that write Assigned Risk business do not expend significant resources explaining to customers (particularly Assigned Risk customers) the potential for Shock Audits after a policy ends.
To be fair, insurance companies do nowadays issue some explanatory information attached to the policies. But such explanations often get overlooked by policyholders, buried as it may be in an insurance policy that can be overflowing with fine print and technical terms. Insurers and insurance regulators have made genuine efforts to make policies more user-friendly, but in spite of this, a great many who purchase Workers Comp insurance are genuinely taken aback when they receive one of these Shock Audits. It has become clear to me, over many years, that the system for providing Workers Compensation insurance for smaller business enterprises often fails to adequately inform those businesses of the likely real ultimate cost of the insurance.
Larger, more established businesses often can get coverage through the voluntary market--indeed, they may be in a position to receive competing proposals for that coverage, from competing insurance agents and agencies. They are often in a much better position to find an insurance agent who is capable and motivated to provide reliable advice about commercial insurance. And in the voluntary market, agents and agencies can sometimes have leverage to persuade an insurer to be more lenient with a client, particularly a client with large premiums and commissions.
In the Assigned Risk plans, agents typically have no such leverage.
For all these reasons, plus an occasional language issue (where English is a second language for some minority businesses) I fear that the issue of Shock Audits overwhelming a small business will continue to be a problem that impacts minority-owned businesses even more than the average business enterprise.
In a follow up post, I will try to offer a few suggestions for things that could be done to address the problem. Stay tuned.
Turns out, when I ask this robot something like "I need outside help disputing a Workers Comp audit", the advice offered is less than helpful, in my view. Let me explain why.
First, the robot suggests consulting a CPA. In my experience, that's not so likely to really help much. The rules about Workers Comp audits are distinct and specialized and while accountants often get involved in helping with payroll amounts for WC audits, they are not knowledgeable, generally, with the the various and varying rules that govern other key elements of audited premium such as classifications, experience modifiers, and schedule rating.
Next, the robot suggests contacting "a workers comp attorney". Again, nice try but no cigar. First off, most attorneys who hold themselves out as handling workers comp are claims attorneys, not specialists regarding premium charges. In my experience, most attorneys I work with (with a few notable exceptions) are not very familiar with the arcane rules and regulations that govern workers comp audits and premiums. Now, if one is being sued over a workers comp audit, you do indeed need an attorney to represent you in the lawsuit. But that attorney still needs an expert to actually dispute the audited premium being sought by the insurer. I do a lot of that kind of work. But if there is no lawsuit (yet) an attorney typically does not have the specialized training and experience to actually dispute an audit.
Finally, ChatGPT suggests contacting your agent or broker. This isn't entirely wrong, just mainly wrong, in my experience. Agents or brokers will often attempt to help with disputing an audit. But my experience is that they are often of limited actual help as insurers tend to dismiss the pushback provided by agents and brokers. Insurers typically go through the motions of reviewing what the agent/broker sends in and then politely respond with technical gobbledygook that is self-serving and ends with the insurer concluding that no change in the audit is indicated.
Simply put, it requires very specialized training and experience to successfully dispute a workers comp audit--more so if litigation has been initiated by the insurer over the unpaid audit, as serving as an expert witness for a court case requires a certain skill set over and above technical competence in a field.
That being said, ChatGPT then provides some advice on what needs to be done to dispute an audit, advice that appears to be cribbed from my own online materials. So while this information could be helpful, it overlooks that it typically still requires a human with specialized knowledge to actually apply these general suggestions to a specific employer's specific audit.
On the other side of the ledger, though, one of my extremely capable associates just used ChatGPT to devise a Python script to analyze a long and complex document from a client, something that considerably reduced our time, and thus saved our client money.