03 May Does Your Customer Know Whether the Workers’ Compensation Policy Is Subject to Audit?
In most E&O claims, the litigation is due to an underlying bodily injury or property damage claim that was not covered or settled to the customer’s satisfaction. However, there have been numerous E&O claims where the allegation deals with a premium issue. One of the more common involves workers’ compensation (WC) coverage and the issue of an audit premium adjustment.
Let’s take the scenario of the customer securing a WC policy. At the end of the policy term, the company audits the account and provides the customer with a bill for an additional premium based on payroll increases. What if the customer was not aware of the audit provision and the potential of an additional premium? Quite possibly, the customer thought the “initial” premium was the “final” premium (they may very well allege this). If this is the case, based on the size of the additional premium, there is certainly the possibility that the customer will sue the agent (E&O claim), claiming that they were not aware of the audit provision. Based on the case’s specific facts, a number of these E&O claims have resulted in a judgment against the agency.
So what should the agent do to minimize the potential of this scenario occurring in their agency? Essentially provide full disclosure.
Agents should discuss the premise of workers’ compensation with customers and that the premium is based on specific payroll projections. These discussions should include whether the policy is “subject to audit” and what will happen if the payrolls are higher / lower than initially projected. These discussions should obviously be well documented. In addition, any proposals/offerings of coverage should include statements detailing any audit provisions and when any additional premium payments will be due.
Another situation that has occurred occasionally involves a misclassification of the payrolls. In other words, the agent “assigns” the WC code based on their knowledge of the account and their belief of which classification is proper. If the auditor assigned feels that an incorrect classification was used at audit time and then subsequently assigns the payroll to a new classification (possibly with a higher rate), this could result in an additional premium. Based on the size of the additional premium, the customer could bring some form of litigation against the agent for the additional premium amount. This is an area where proper use of an industry exposure analysis checklist could provide the agent with the resource to determine the proper code.