What Happens If You Ignore a Workers’ Comp Audit?

Understanding the Workers' Comp audit process

What is a workers' comp audit and why is it conducted?

A workers' comp audit checks your current business operations and compares them to your estimates. The insurance company uses the audit to adjust the premium on the previous policy if there has been an increase or decrease in your employee count or operations.

Who performs the audit and what do they examine?

The audit is typically performed by the insurance company or a third-party auditor. They check if the payroll records and employee class codes quoted at the beginning of the policy accurately represent the actual payroll and range of work done during that time. 

They also confirm the presence of subcontractors' own insurance. If they find that the subcontractors you hired did not have insurance, you can be billed during your audit for payments made to uninsured subcontractors listed on your policy. 

What are the Consequences of Ignoring a Workers' Comp Audit?

Ignoring a workers' compensation audit can lead to substantial financial repercussions. Here are some of the potential consequences to consider:

Noncompliance charge

Failure to comply with the audit process can result in a significant noncompliance charge, leading to a drastic increase in the audit bill—potentially reaching 50% to 200% of the expiring premium.

Policy cancellation

Despite making payments, there is a risk that the insurance carrier may choose to cancel the renewal term. While this may not happen immediately after one year of nonpayment, prolonged noncompliance can eventually lead to policy cancellation.

Involvement of collections agency

Neglected audit bills often end up with a collections agency, which can have far-reaching consequences. The collections agency will usually alert new insurance carriers of outstanding premiums, and the new carrier will usually agree to cancel the premium. This can create significant challenges for the business in securing essential insurance coverage.

How does non-compliance affect your premium? 

In addition to avoiding financial penalties for ignoring the audit, complying with the audit is in your best interest, as the results of the audit can often work in your favor. 

The audit process often uncovers adjustments that can lead to fairer and more accurate premiums, ultimately benefiting your business. On the other hand, if you ignore the audit, you might end up paying premiums based on wrong estimates. 

How should you prepare for your workers’ compensation audit?

Financial data for the time period covered by your workers' compensation policy is required for audits.

To prepare, gather necessary documentation such as payroll records, tax documents, and classifications of employees. 

It's also important to ensure that all subcontractor insurance documentation is organized and readily available for review during the audit. 

Additionally, maintaining accurate and detailed records of any changes in employee count, job duties, or operational scope will help facilitate a smooth and accurate audit process.