Estimated Audit Armageddon

At the A.I.M. offices today, it was a bit hectic as we (well, okay, my son and partner Scott, actually) worked against the clock to save a client from an estimated audit billing that threatened to put the company out of business. The insurer had issued an estimated audit billing for an additional premium of $190,000 (when the original premium on the policy had been under $20,000.)

The client had only gotten us involved in this dispute recently, as the insurance company had put the proverbial gun to his head: pay the additional premium or have the current policy cancelled as of Monday. Actually, it had been the client's insurance agent who reached out to us, when it became clear he could not get the insurer to back off the payment demand/cancellation threat. And without current Workers Comp coverage, this client would be out of business.

This case illustrates a couple of important points that warrant sharing with a wider audience. First off, the idea of an "estimated" audit may need some explanation, as it sounds like a classic oxymoron, kind of like "jumbo shrimp" or, as some veterans like to suggest, "military intelligence". I mean, by definition an audit is supposed to determine actual final premium for the policy, based on the audited payrolls. so how can it be an estimate?

Insurers issue estimated audit billings when they have concluded that they can't get the data they need to determine actual audited premium, or when they feel the data they have gotten is unreliable. In this client's case, the owner had made some inadvertent errors in allocating payroll amounts among various classifications, and then had gotten defensive when pressed by the auditor. So the auditor and the insurer moved all payroll into the most expensive classification listed on the policy--and in the process, produced a quantum leap in premium.

It took a fair bit of work to get the auditor to trust the actual payroll allocations we developed, but with proper documentation it was accomplished. But then, because the policy had been issued by the Assigned Risk facility in Michigan, it took further effort to get the folks at that AR facility to accept the revised audit payroll allocations.

At the end of the day, as time was running out (remember, the current policy was going to be cancelled effective Monday) we got everyone to agree that an additional premium of $4,000 was appropriate and acceptable, and had the client wire the money over.

Beyond illustrating the potential pitfalls of estimated audits, this case also makes clear a principle I have often stressed in the past: it's important to avoid alienating the auditor. If you make the auditor suspicious by a perceived lack of cooperation or misleading or inaccurate information, the auditor can and often will calculate an "estimated" audit premium based on a worst case scenario. So it's usually in the best interest of the policyholder to be as cooperative as possible, and to avoid creating an impression on the part of the auditor that something is being hidden or misrepresented. Keeping a good working relationship with the premium auditor can avoid an estimated audit armageddon. and that is something that every sane business owner wants to do.