Today's Shock Audit Phone Call

 We get a lot of phone calls and emails from employers all over the country who have received what we term a "Shock Audit" for Workers Compensation insurance. A Shock Audit is when an employer gets a premium audit bill from their Workers Comp insurer for far, far more than they had anticipated.

Today's call was from a Chicago area small construction company who has just received an audit bill for an additional $300,00.00 from their insurance company. In the past, they told me, previous audits had produced only modest changes in premium. But not this year!

The main problem is that this employer had relied upon Certificates of Insurance from some of their trusted long time subcontractors. These COI had documented that these folks had their own Workers Compensation insurance.

But when this contractor had their own premium audit done for their policy, the insurer informed them that these subs had a lapse in coverage and so that $300,000 bill. Now, the insurance company knew this but the insurer had also written the policies for the subs. But had not notified our new client when those policies had lapsed. But once the audit was done, the insurer was more than happy to explain the significance of this lapse.

We believe we can help this client knock down at least a great deal of the additional premium sought by this insurance company. And we're grateful to the client's attorney, who found us and recommended the contractor reach out to us.

And so, the game is afoot!

Minority Owned Business and Workers Comp Audits

 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.

Interesting News

 Just received interesting news. The National Council on Compensation Insurance (NCCI) has contacted us to obtain the details about a recent classification decision by the Illinois Department of Insurance for our client. This client did manufacturing work but maintained an in-house tool and die department. For many years, Illinois had an NCCI State Special rule that allowed such tool and die departments to be separately rated into a less expensive class.

But last year, a client came to us because their insurer started using a new interpretation of the (admittedly awkwardly written) state special rule, and using this novel interpretation, the insurer said this client was not eligible for the lower tool and die class.

We first went to the Illinois Workers Compensation Appeal Board over this, but that board ruled in favor of the insurer. We then appealed that decision, on behalf of our client, to the Illinois Department of Insurance.

This case illustrates, I think, the unique capabilities of my company in such disputes. I was originally involved in helping the client, but once a legal hearing was required, my son and partner, Scott Priz, took over, as he is an attorney admitted to the bar in Illinois. Of course, he's worked with me for over twenty years here at A.I.M. so he has extensive experience with the details of Workers Comp insurance classifications and rates.

The Illinois Department of Insurance ruled in favor of our client, as I've reported here earlier. But now NCCI has reached out, asking us to provide details of the ruling by Illinois DOI, so NCCI can revise their manuals.

This will help make sure other Illinois manufacturers don't have to deal with this "novel" rule interpretation. We had heard that some other insurers were doing so, but this should head them off at the pass.

Congratulations to Scott Priz for obtaining this important decision at the Illinois Department of Insurance. And kudos to the National Council on Compensation Insurance for acting promptly to reflect this DOI decision in their manual rules.

A Case We lost--and Then Won

 A little while ago, we lost a case at the Illinois Workers Compensation Appeal Board. But we just got word we have prevailed in an appeal of that decision by the board. Here's the skinny on all this:

The Workers Comp insurer for a client of ours had insisted on a new interpretation of a long-standing understanding regarding application of an Illinois state special classification rule for companies that have an in-house tool and die operation as part of their manufacturing company. The understanding had always been that the language of that state special classification rule was that such tool and die operations should be separately classified into the less expensive Code 3113. This had been routinely and regularly done by premium auditors for many years.

But this insurer insisted on a different interpretation—that the tool and die operations had to be conducted as a separate business and not as a support function of the overall business.

We took this dispute to the Illinois Workers Comp Appeal Board on behalf of this client. And lost.

But we then appealed that decision by the board, to a legal hearing at the Illinois Dept. of Insurance. And we have now been informed that we have prevailed there.

This was possible because my son and business partner, Scott Priz, is also an attorney (in addition to being a brilliant and experienced consultant on Workers Compensation insurance premium issues). And Scott handled this appeal for our client, since a legal hearing, unlike the Appeal Board, really requires an attorney to properly represent the interests of the client.

We are also informed, from our agent contacts, that this new interpretation of the state special rules is being applied by other insurance companies in Illinois. And while this decision by the Illinois Department of Insurance solves this problem for our particular client, it will not address the wider issue of other insurers doing this to other small businesses.

If you know of a company being impacted by this, perhaps we should talk. We’ll be doing our best to identify other policyholders harmed by this, but that will take some time and likely can’t find everyone. Still, we’ll be doing our best.