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.
