Monday, January 18, 2021

Another Shock Audit Illustrates What's Wrong With Workers Comp For Small Biz

 I know I sound like a broken record, going on about these Shock Audits for Workers Comp we see just about every day from some small employer somewhere in the U.S. But I keep writing about it because it is such a widespread problem and yet is on no one's radar screen.

So this particular small biz is from my home state of Illinois. He was in the construction biz, doing home remodels and he bought an Assigned Risk policy. The policy was sold to him as a Minimum Premium policy with premium of $1,500 and ran from 6-15-2019 through 6-15-2020. After the policy ended, the insurance company sent out an auditor. And after the auditor was done, that $1,500 policy had turned into a bill for $179,070.

Can you imagine any other business service a small biz might purchase that could legally get away with that?

The worst thing is that, for this particular Shock Audit, there doesn't appear to be a lot I can do to reduce the bill. Because everything appears to have been done according to the rules. It's just that the rules suck.

Let me be more specific. The rules are largely written by the insurance industry, for the interests of the insurance industry. And that's why a small business owner can be sold a policy for $1,500 and then, a year later, get a bill for $179,070.

That's because, in Illinois (and most other states) independent contractors paid on a 1099 basis get treated, for Workers Comp insurance purposes, just the same as regular W-2 workers. And this particular business used a fair amount of 1099 labor during the policy.

Only nobody explained that to this small business when the policy was sold. And nobody's required to explain it. And in the normal course of the insurance business no one does explain it.

This small biz is based in Chicago. The policy was sole by a small agency out in Frankfort, Illinois, way out in the south suburbs. And because it's an assigned risk policy, the agent makes very little money in commissions. But if you sell a lot of these tiny minimum premium policies I suppose you can make a bit of money.

But agents don't typically spend much time with such accounts--who could afford to? But that means these insurance agents are just order-takers. Order takers who commonly don't take the time to explain to these tiny accounts about the potential for these Shock Audits.

And because insurance agents aren't required to be anything more than order takers (unless they voluntarily start to offer advice, thus creating some additional professional duties) the small business owners who use their services don't really have any recourse against the agents who sold them these policies.

Yes, insurance agents aren't legally treated the same as other professionals like an accountant or attorney, even though many insurance agents aspire to similar professional status. So unless the agent can be shown to be acting as an insurance advisor, in addition to just selling insurance as an order taker, the small biz owner on the receiving end of one of these Shock Audits has no recourse against the agent who sold the policy.

And the insurance company? Heck, they're just charging the premium that's really due under the rules. Too bad the system allows these minimum premium policies to be sold without making sure somebody is really explaining how these Shock Audits can happen.

Insurance companies and agents aren't required to provide any simple and clear warnings about this at the time the policy is sold. But insurance companies sure do love to provide lots of explanations after the policy has ended and they are trying to collect one of these huge Shock Audit premiums.

See what I mean about the rules being largely designed for the interests of the insurance industry?

Now, fortunately, a lot of times I can find ways to reduce these audits, because the insurance system still manages to build in overcharges into these audits a lot of times, overcharges based on errors in classifications or payroll determination or experience modifiers. But I can't help all victims of Shock Audits, alas.

And so, pretty much every day, I get a phone call or email about another Shock Audit.

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