“When the Auditor Calls” regarding a policy audit, it is a good idea for agents to be at the ready with a checklist of what documents will need to be produced for the policy audit. To that end, Agency Checklists has compiled a list of the general materials that an agent should help their insureds gather in preparation for the actual audit.
Documents That Should Be Gathered in Anticipation of the Policy Audit
- These should be for all 4 quarters covering the policy period.
- IRS Form 941 is required for employers to report primarily payroll taxes (withheld federal income tax and both employee and employer shares of social security and Medicare taxes) for each quarter.
State Unemployment Quarterlies.
- Quarterlies should be for also be for all 4 quarters of the policy period.
Gross Payroll Records.
- Remember that gross payroll wages will include vacation, sick, holiday, overtime, bonus, and commission payments. Premium overtime (weekends and holidays) in the State of MA is excluded though.
W-2’s showing gross wages paid to all employees.
Vendor or Sub-contractor report: detailing all payments made to each sub-contractor.
1099’s showing payments made to sub-contractors/vendors.
- The issue of independent contractors and subcontractor classification is a hot issue in Massachusetts law. Misclassifying employees as independent contractors paid on a 1099 can be a very costly mistake as some AgencyChecklist articles attest: “Looking at the Massachusetts Independent Contractor Law;” “Guilty Pleas for Felony Premium Fraud in Misclassifying Workers as Independent Contractors.” A number of other articles can be found by simply searching for “independent contractors” on the AgencyChecklists.com search function at www.AgencyChecklists.com [Upper right corner].
Certificates of Insurance.
- The insured will need them for each sub-contractors/vendors to satisfy the conditions of G.L. c. 152, § 18.
- If there are no certificates evidencing workers compensation insurance for the insured’s independent or subcontractors there is a very real risk that any payment will be added back to the remuneration calculation for the insured. The statutory test is if “such work [as done by the independent or subcontractor] were executed by employees immediately employed by the insured, [the insured would] be liable to pay compensation under [the workers compensation act].” This is a very legal broad standard that the auditor is going to win on if there are no certificates to show that a subcontractor has its own coverage.
Employee Classification and details of duties.
- The auditor is going to try to classify each employee or sub-contractor correctly for rating purposes.
- A detailed description of duties will be preferable to general descriptions. Advise the insured that the auditor is not going to allocate, for example, an employee who is employed for both office work and landscaping work between the office and landscape codes. In such cases, the worker is going to be allocated one hundred percent to the higher rated classification. This classification will indeed raise the employer’s insurance cost for an employee who only works sometime as a landscaper. But from the insurance company’s view the cost of a landscaper’s injury is going to be on average significantly more expensive than an office worker’s injury.
- If an agent has a classification issue for a particular insureds workers compensation policy, a useful resource is the Massachusetts Workers Compensation and Inspection Bureau (“WCRIB”) www.wcribma.org. The bureau will, upon request, provide advice and guidance on difficult classification matters.
Office Locations and addresses.
- The insured should maintain a current list of all addresses where work is conducted or equipment stored such as warehouses to ensure proper coverage.
- A list should be created of where all business operations were conducted during the policy period to ensure correct coverage.
- An auditor does not necessary require details of the claimant’s injury but the auditor may require the claimant’s name and detail or description of the work being performed at time of injury to confirm correct classification of the injury and the fact that the insured is not misclassifying employees to less expensive rating classes.
If things go awry with the policy audit…….
Remember if your insured disagrees with a workers compensation insurance audit result, there are some ways in which you can help them:
- If an insured’s workers compensation policy is placed either in the voluntary market or assigned, the insured or its agent can “submit a written request for a review of the method by which your classification, rates, premiums or audit results were determined.” If the carrier does not respond with thirty (30) days or the insured does not believe the answer is correct, the insured can appeal to the WCRIB. Also, there is a further appeal to the division of insurance within thirty (30) days of the bureaus decision [or failure to decide within thirty (30) days].
- If an insured’s workers compensation policy is placed through the assigned risk pool they have the additional right not afforded to voluntary market insureds to appeal a cancellation. Upon receipt of a cancellation an assigned risk insured may file objections to the cancellation within ten (10) days at the department of industrial accidents’ office of insurance. The filing of timely objections will stay the cancellation pending a hearing before the department of industrial accidents. In this case, an adverse decision is appealed to the Suffolk county superior court and not to the Division of Insurance.
- Finally, if an audit relates to a policy other than a workers compensation policy the first appeal is to the rating bureau or insurer that filed the rate as they have to provide, “reasonable means whereby any person aggrieved by the application of [a] rating system may be heard…to review the manner in which such rating system has been applied in connection with the insurance…” In this case, the appeal is again to the division of insurance.
Note: On rate appeals, other than at the department of industrial accidents’ cancellation hearings, insurance agents or brokers may represent their insureds.