The Workers’ Compensation Rating and Inspection Bureau (“WCRIB”) has asked the Division of Insurance (“Division”) to allow workers’ compensation insurance carriers to apply a charge that could double premiums for voluntary market insureds that do not allow the carrier to examine and audit their records.
In response to the request, the Division has scheduled a hearing on October 20, 2016, at 10:00 A.M. to accept testimony and written submissions on the WCRIB’s request.
Proposed endorsement to voluntary policies would impose charge for audit refusals
The WCRIB request would allow carriers in the voluntary market, starting January 1, 2017, to add a new Audit Noncompliance Charge Endorsement to new or renewal policies that would allow insurers to impose a Audit Noncompliance Charge against employers that fail or refuse to allow a records audit.
Audit Noncompliance Charge Endorsement needed because present law and policy forms do not provide effective remedy for refused audits
Presently the standard workers’ compensation policy requires the insured employers to keep and provide records related to the policy and to allow the policy’s insurer to conduct audits of those records. These provisions appear as sections F and G of the policy’s Part Five:
- Section F. (Records) provides that the employer must keep records of information necessary to compute premium and provide those records to the carrier when requested.
- Section G. (Audit) provides that the carrier may examine and audit all records related to a policy during the policy period and up to three years after the policy expiration.
Using their rights under these sections, workers’ compensation insurers can obtain the necessary information through the audit process allowed by policy section G to determine final premium due. However, when an employer does not allow the insurer to examine and audit its records, the insurer cannot properly determine the final earned premium.
Current Massachusetts law or policy forms do not grant insurers many options to either force an audit or sanction the employer that neglects or refuses to provide the insurer the needed records for a final audit.
New endorsement part of a unified approach to premium fraud refused audit
The new endorsement results from heightened insurance industry concerns relative to workers’ compensation insurance fraud and, in particular, to employers directly or indirectly refusing or avoiding policy audits. E.g. See Agency Checklists, May 3, 2016, “Guilty Plea For Hiding $2.7 MiIlion From Comp. Auditors and the IRS.”
A Fraud Subcommittee, established by the WCRIB Governing Committee in 2015, recommended the National Council of Compensation Insurers’ (“NCCI”) Audit Noncompliance Charge Endorsement form be adopted to compel compliance with audits and record keeping requirements under of standard workers’ compensation policy form.
The WCRIB’s filing in Massachusetts tracks the NCCI’s attempt to create a national rule through the adoption of the Audit Noncompliance Charge Endorsement to ensure a more uniform approach across all states for employers that do not allow the carrier to examine and audit their records. When the WCIRB made its filing with the Division of the Audit Noncompliance Charge Endorsement and supporting materials on July 22, 2016, 34 states and four independent rating bureau states had already adopted the Audit Noncompliance Charge Endorsement developed by the NCCI.
While the WCRIB files its own rates and state specific forms, it does license the use of the NCCI policy form and endorsements. The WCRIB filing, with the permission of the NCCI, proposes to adopt NCCI’s filing, but with certain amendments specific to the Massachusetts workers’ compensation market.
Proposed Audit Noncompliance Charge Endorsement form
The proposed policy endorsement form the WCRIB has submitted to the Division to approve at its hearing on October 22, provides:
AUDIT NONCOMPLIANCE CHARGE ENDORSEMENT (WC 00 04 24)
Part Five—Premium, Section G. (Audit) of the Workers Compensation and Employers Liability Insurance Policy is revised by adding the following:
If you do not allow us to examine and audit all of your records that relate to this policy, and/or do not provide audit information as requested, we may apply an Audit Noncompliance Charge. The method for determining the Audit Noncompliance Charge by state, where applicable, is shown in the Schedule below.
If you allow us to examine and audit all of your records after we have applied an Audit Noncompliance Charge, we will revise your premium in accordance with our manuals and Part 5—Premium, E. (Final Premium) of this policy.
Failure to cooperate with this policy provision may result in the cancellation of your insurance coverage, as specified under the policy.
Note: For coverage under state-approved workers’ compensation assigned risk plans, failure to cooperate with this policy provision may affect your eligibility for coverage.
Proposed rules for doubling premium with Audit Noncompliance Charge
Additionally, the WCRIB proposes to amend the “Massachusetts Workers’ Compensation & Employers Liability Insurance Manual” (“Manual”) to provide the conditions relating to the application of the Audit Noncompliance Charge Endorsement.
Under the proposed additions to the Manual, the rules for the Audit Noncompliance Charge Endorsement will provide if the employer does not comply with Part Five—Premium, Section G. (Audit) of the policy, the employer will be considered noncompliant with the policy terms and conditions. The insurer may then apply an Audit Noncompliance Charge of “up to two times the estimated annual premium.” (Emphasis added).
In order for the insurer to bill the insured for an Audit Noncompliance Charge, the following condition have to apply:
- Carriers must comply with all applicable Massachusetts state laws and/or regulations related to audits of workers’ compensation insurance policies.
- The Audit Noncompliance Charge Endorsement must be attached to the policy at inception of the policy term being audited.
- The carrier must make two attempts to obtain the audit information and/or complete the audit. At each attempt, the carrier must notify the employer regarding the specific, required records and the amount of the Audit Noncompliance Charge to be applied if the employer fails to allow an examination and audit of all records that relate to the policy.
- The carrier must adequately document the audit file regarding the above attempts to obtain the required audit information.
- When a carrier applies an Audit Noncompliance Charge to the policy, and mid-term cancellation is permissible, the carrier may cancel the policy and must issue a cancellation notice in accordance with applicable Massachusetts state laws and/or regulations.
Under the proposed amendment to the Manual, the Audit Noncompliance Charge rule applies to all types of audits, whether mail, email, telephone, or in person at the employer’s business location. Also, the Audit Noncompliance Charge applies to guaranteed cost policies as well as retrospectively rated policies.
Refund of paid Audit Noncompliance Charge when employer allows adequate audit to take place
The provisions of the Manual, however, also will provide relief to a recalcitrant employer that has been charged an Audit Noncompliance Charge, if the employer sees the light and allows the insurer to audit.
The proposed conditions for the application of an Audit Noncompliance Charge specifically provides that the carrier that has charged an insured an Audit Noncompliance Charge:
…must refund the Audit Noncompliance Charge to the employer or apply it to any outstanding balance on the policy, after the employer has paid the Audit Noncompliance Charge and has allowed an examination and audit of all records that relate to the policy.
Copy of WCRIB filing available
For a free copy of the WCRIB’s filing with the Division of Insurance, please send your request to: scotter@agencychecklists.com.
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