PREPARING FOR YOUR INSURANCE AUDIT

Nick Langer, Turner Surety & Insurance Brokerage, Inc.

While workers compensation rates continue to decrease, one thing remains the same; final audits at the end of your policy term can be arduous. Fortunately, they do not have to be. Navigating and fully understanding the workers compensation system in California is difficult and most businesses do not have the time or resources to invest in having an in-house expert. With tight margins and ever-increasing competition, Private Patrol Operators simply cannot afford to be misinformed.

The first step in preparing for your final audit starts with having a better understanding of the law, your obligations as a California employer and rules set forth by the Workers Compensation Insurance Rating Bureau (WCIRB). Included below are 5 facts about workers compensation that every California employer should know.

Workers Compensation – The Facts:

• Under California Labor Code Section 3700, all employers with one or more employee must provide workers’ compensation benefits to their employees.
• California Corporate Officers & Managing Members of an LLC can be excluded if they own at least ten percent (10%) of the issued and outstanding stock.
• Worker’s Compensation premiums are based upon “annual remuneration” of all employees. Annual remuneration is not exclusive to payroll. Annual remuneration includes:

Gross wages                     Salaries                                  Commissions

All bonuses                                  Most profit sharing   Vacation pay

Holiday & sick pay                     Automobile allowances                   

Overtime (“straight time” portion only)

• The Workers Compensation Insurance Rating Bureau develops and maintains the Standard Classification System. (Class Codes)
• The workers’ compensation experience rating system is a merit rating system intended to provide employers a direct financial incentive to reduce work-related accidents. The California Workers’ Compensation Rating Insurance Bureau (WCIRB) calculates an Experience Modification Rate (EMR) for every qualifying employer.
  • High EMR’s (over a 1.00) will increase your workers’ compensation premiums
  • Low EMR’s (below a 1.00) will decrease your worker’s compensation premiums

 

Preparing For Your Final Audit

Workers’ Compensation policies are written with premiums based upon your company’s payroll (remuneration) estimate at the beginning of each policy period. At the end of the policy period, your insurer will audit your payroll records to obtain your actual payroll numbers. This procedure is required for 2 reasons:

1. To compare your actual payroll with your estimated payroll. Your premium is then adjusted accordingly.
2. To submit your actual payroll data along with your actual losses during the policy term to the WCIRB. This allows the rating bureau to then calculate your experience modification rate (EMR).

Your insurer has the right to audit payroll records at any time. Failure to comply with an insurance company’s audit can lead to the cancellation or non-renewal of your policy, and insurers can use all legal means at their disposal to collect outstanding premiums.  In addition, the WCIRB can promulgate (calculate) your experience modification rate using reported loss data and excluding unaudited payroll, resulting in an increased experience modification rate. It is important to be aware that the deliberate under-reporting of payroll or misclassification of payroll is considered insurance fraud and can be prosecuted to the fullest extent of the law.

Here is the type of information you may be asked to provide:

• Accounting ledger.
• Tax forms – Specifically, Form 941 and 944, Employers Federal Tax Return, and State Payroll Tax records (EDD – DE9/DE9).
• Records of cash disbursements.
• Payments for services provided by independent contractors. The auditor needs to verify that these workers are not your employees.
• Payments for services provided by subcontractors.
• Certificates of insurance for each subcontractor you hired
• W-2 and 1099 forms.
• Job description for each worker. Make sure the description accurately describes the workers’ duties.
• Description of your business operations.
• Payroll records by classification and access to your payroll system, employee time cards and all electronic time keeping systems for the term of the policy. The auditor needs to verify all sources of remuneration provided to each worker (salary, bonuses, etc.).
• Certificates of insurance for every OCIP or CCIP you were enrolled in during your policy term.

Understanding what is expected of you will help to expedite the process and minimize confusion at the time of your final audit. Coordinating with your Insurance Broker and CPA prior to your final audit can help to eliminate costly mistakes.

Nick Langer is a Senior Risk Advisor at TSIB with more than 15 years of property & casualty broker experience. He specializes in the Construction, Energy and Security Industries. Nick enjoys the challenge of finding solutions to his client’s unique needs and is committed to learning the intricacies of each client’s business operations.

Prior to joining TSIB Nick had his own insurance agency that specialized in both personal and commercial lines of insurance. After 7 successful years of growing his property and casualty agency he joined Tolman & Wiker Insurance Services, LLC.

Nick regularly presents at trade associations on risk management topics including: Workers’ Compensation, Claims Management, Risk Management, Contractual Risk Transfer and Employment Practices Liability.

Nick is committed to improving the lives and success of his clients for the benefit of the community through his various roles and leadership positions. He has served as the Insurance Advisor to the Board of Directors of The California Association of Licensed Security Agencies, Guards and Associates (CALSAGA). He is President of The Bakersfield Young Professionals in Energy (YPE), a member of the Associated Builders & Contractors (ABC), and the former Government Affairs Committee Chair for the Central California chapter. Nick is a member of the Associated General Contractors (AGC) and the American Society of Safety Engineers (ASSE).

Nick has Bachelor of Science in Business Economics from University of California, Santa Barbara. Nick and his wife have three children and three rescue dogs. In his spare time, Nick is an avid fisherman and enjoys golfing, hiking and fitness training.

FIVE QUESTIONS INSURANCE UNDERWRITERS ASK ABOUT SECURITY COMPANIES

Tory Brownyard, Brownyard Group

Whether we’re insuring a family mini-van or an oil company operating in a hostile environment, insurance underwriters carefully evaluate the risks and exposures facing a particular person or company. In commercial underwriting, we consider a company’s loss experience, risk management practices and other factors in determining whether or not we can accept the risk and what kind of coverage it requires.

For the security industry, there are several questions we ask ourselves about a company and its application. Here, I review some of these questions and try to shine a light on insurance coverage for security firms based on my experience as an insurance underwriter for security risks.

What industries does the firm work with?

Many security firms specialize in serving one industry or environment, whether that’s government contracts, retail stores or large events. An application for insurance will often ask detailed questions on this topic.

This helps underwriters determine if a firm is a “low-profile” or “high-profile” risk. A high-profile security risk assigns officers to posts that have a great deal of exposure to the public, large crowds or criminal activity. Unfortunately, there is another factor we must take into consideration when looking at industries served by a firm: active shooter risk. Some environments have been susceptible to active shooter incidents, such as hospitals and churches.

Low-profile risks, like those serving industrial warehouses, government contracts and office buildings, tend to go through the underwriting process quickly. Other factors determine how the account may be priced.

Is the work armed or unarmed?

The debate over staffing armed guards in schools has been playing out in the media over the past several years. As you well know, the question of providing armed guards to a particular post requires a complicated answer. That is why this is an important question to many underwriters. In my work, I consider whether or not a particular environment could necessitate an armed officer. For example, some government contracts may require and warrant staffing armed security officers.

We will also consider the person behind the firearm. From an underwriting perspective, an ideal armed security officer has been properly screened, carries the appropriate licenses and has extensive firearms training. For that reason, we often consider former or off-duty law enforcement professionals to be qualified armed security professionals. They are more likely to have extensive training and experience handling firearms.

Who does the firm hire and how are they trained?

Rules about hiring and training security officers vary from state to state. Of course, an insurance underwriter will expect firms applying for coverage to follow state rules and regulations. We also expect firms to subject potential hires to the usual criminal background check and to ensure they are permitted to carry a firearm, if applicable. However, we may also consider whether or not the company tends to hire officers with a background appropriate for their posts. As mentioned above, from an underwriting perspective, people with law enforcement experience seem like the safest bet for armed posts.

We also take pay scale into account. Are most of the guards earning around minimum wage? Are they towards the top of the industry pay scale? The answers to these questions can tell underwriters a story about the experience level of the firm’s workforce. Though some officers will be entry-level, we would like to see these early-career employees balanced with experienced, trained professionals.

Underwriters may also ask about and consider the type of training provided to security officers. We will consider if it prepares them for the settings in which they work. An officer posted to a hospital emergency room may be served by training that can help them deescalate fights in that sort of environment. In general, underwriters like to see situational training to hone skills needed for different environments.

Lately, we have also been reviewing active shooter trainings. A well-planned active shooter training program and response protocol can help a security company minimize liability in the event of an active shooter claim.

What is the “loss experience” of the risk?

When we talk about a firm’s “loss experience,” we are talking about the number of claims a security firm has incurred in recent years and the nature of those claims. Overall, the security industry has an infrequent but severe loss experience; that is, security firms are not often involved in incidents or litigation that cause an insurance claim, but when they are, those claims involve large settlements or expenses.

Every firm will have a large claim from time to time, but low-profile firms have low claims frequency. A firm with three or more losses a year may have a problem with its screening and training practices. This is particularly true if those losses result from actions like a security officer assaulting someone. When such patterns emerge, an insurer is more likely to decline to write an account.

What do their contracts look like?

Insurance underwriters are not lawyers, so we cannot provide advice on the finer details of contract law. However, contracts transfer a great deal of liability, so we do often discuss the implications of certain types of contract language with our insureds and potential clients. Some security services contracts will transfer all liability to the security firm—which puts the firm in a difficult position. We prefer language that will limit the insured’s liability to their own negligence and not assume liability for their client’s negligence. It is also important that the contract clearly states the duties and responsibilities of the security officers.

Underwriting guidelines differ from insurer to insurer, as every insurer has a slightly different risk appetite. In general, admitted insurers have less risk appetite, while insurers on the non-admitted market—whose customers are not subject to the protection of state regulations—are able to accept riskier accounts.

If you have further questions about how your insurance policy is underwritten and priced, your insurance broker is a great resource.

Tory Brownyard, CPCU, is president of Brownyard Group (www.brownyard.com), an insurance program administrator with specialty programs for select industry groups. In addition to his responsibilities as President, he currently spearheads the Brownguard security guard insurance program. Tory is a highly-regarded subject matter expert in the field of Security insurance and has contributed to industry publications such as Security Magazine and has been featured regularly in leading insurance publications. He can be contacted atTBrownyard@brownyard.com.