Part 3 of the 6 part series What Every Employer MUST Know
About Workers Compensation Insurance
A "How to" Guide
My previous article dealt with the alarming fact that a
large number of organizations have had their employees
improperly classified for purposes of workers compensation
insurance (Workers Comp Misclassifications Can Cost
Employers a Fortune). The consequence of misclassification
could mean that a business unknowingly paid far more in
workers compensation premiums than they should have. Just
think if you found out that your company overpaid and could
be entitled to a refund? How could use this "found money"?
This article will serve as a "How To" guide to see if your
company has overpaid and deserves a refund due to employee
misclassification. How you ultimately spend the money is
up to you!
What information is necessary?
The first thing you need to do in order to conduct your
self audit is to gather lots of documentation. You will
need your workers compensation declarations pages, audit
statements, experience rating worksheets, merit rating
worksheets, loss runs, running totals of premiums paid and
attributable to workers comp premiums, and records of any
dividends received. Unfortunately, you will need this
information for each policy year being audited. I would
recommend auditing at least the previous 5 years worth of
data. If you find a smoking gun in any of those 5 years,
you may wish to audit prior years as well. One error can
indicate past inaccuracies and can compound the effect of
future mistakes.
How do I know if my classification is correct?
Once you have collected all this information, your work
really begins. What you must determine is whether or not
your organization was properly categorized based upon what
it actually did during each policy period in question. To
make that determination easier (in Pennsylvania), the
Pennsylvania Compensation Rating Bureau (PCRB) has
published a set of Standard Survey Instructions on its
website (http://www.pcrb.com/). This 85 page survey begins
with some general questions about your organization and
then moves into specifics regarding your particular
industry. For instance, if you are questioning whether
your business is properly classified as a Paper Products
Manufacturer, the following is a list of the industry
specific questions you would need to answer:
List, and provide percentages for, the raw materials and
finished products.
Does the risk manufacture paper/operate a paper mill?
Provide a step-by-step description of the manufacturing
process.
Does the risk provide contract paper services such as
slitting, sheeting, winding, finishing, laminating, etc.?
If yes, provide a detailed description of these services.
List all equipment used in the risk's manufacturing and/or
processing operations.
As you can see, these are not for the most part "yes" or
"no" questions and can take quite a bit of time to answer.
Where do I submit the results?
After assembling all the data you are now ready to submit
your findings to the PCRB. Neither you nor your insurance
company can just change your code. Your code change
request must be approved and processed by the PCRB. There
are very specific procedures that must be followed and are
available on the PCRB website.
To go back to our paper products manufacturing example,
let's assume the PCRB determines your company should
actually be classified as a distributor. We'll also assume
that the distributor class is less expensive. You can then
begin to calculate (using all your assembled worksheets)
the amount of your refund. Your insurance company will
probably be willing to help you do these calculations but I
would double check them anyway. You will also need to
determine the number of years your company has been
misclassified. Obviously, if you changed from a
manufacturer to a distributor 10 years ago, your refund
could be substantial.
Why don't more companies do this?
That's a very good question! For one thing, even though a
company could get a substantial refund, it can be a big
project to handle internally. There is also no guarantee
that any refund is due. Another reason is because many
organizations just assume that all of their information is
correct.
How can I learn more?
If you would like more information on how to determine
whether your organization has been misclassified you can
contact me using my information listed below. Our company
is fully equipped to help you perform your own audit or you
can outsource the entire project to us.
Are there any other places my insurance provider may have
miscalculated?
Absolutely! That is why my next article will deal with how
to ensure your experience mod is correct. An incorrect mod
can cost you a bundle as well. Until then...
----------------------------------------------------
Eric D. Patrick, is an attorney and Chief Operating Officer
of Consumers Insurance Agency Inc.
http://www.consumers-insurance.com . He is involved in two
law practices and engages in insurance and legal consulting
through his RiskAssure Consulting Group. Please contact him
for further information.
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