PREPARING FOR YOUR INSURANCE AUDIT
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:
- To compare your actual payroll with your estimated payroll. Your premium is then adjusted accordingly.
- 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.