Was this your reaction the last time you received an audit bill from your insurance company? I am writing to help homebuilders and remodelers understand why they incurred additional premium charges following their audit, so they may be better equipped to avoid surprising or unnecessary costs.
Determining insurance premiums is a relatively straightforward exercise for construction companies: a fixed rate is applied per $1,000 in payroll and/or subcontracted costs (and, in some cases, sales) for general liability, and per $100 payroll for workers’ compensation. These exposures are estimated at the beginning of the policy term and confirmed following audit, resulting either in additional premium charges or return premium credits. Simple enough, right?
Here a several questions to keep in mind to prevent an unpleasant surprise following your next audit:
1. Are my estimated exposures appropriate?
I have yet to meet a single person, reasonable or otherwise, who enjoys paying insurance premiums–let alone more premiums than necessary. One general strategy for reducing insurance premiums is to under-estimate payrolls at the beginning of the policy term. Taking a bearish approach to exposure estimates makes sense in some scenarios–for instance, if your policy contains a 100% minimum and deposit premium provision or if the globe is in the midst of a pandemic—but, this strategy is accompanied by the risk of high additional premium charges following the audit if/when you exceed your estimates.
You can mitigate this risk by either: a) adjusting your estimates midway through the policy term to align with your actuals or b) estimating your final annual premiums by applying your rates to your actuals and preparing for the audit charge accordingly.
2. Are my class codes accurate?
The most common class codes reflected on a homebuilder’s workers’ compensation policy are 5645-one or two family home construction and 5606-executive supervisor. The difference in rate per $100 payroll between these two classes is $5.63 ($7.10 for 5645 and $1.47 for 5606), which results in painful additional premium charges when payroll estimated in the 5606 class is revised to the 5645 class following audit.
Over the past several years, we have seen a rise in employees historically classed 5606 re-classed to 5645—why? In short, these employees were likely misclassified in the past and their re-classification is a result of a years-long crackdown on classifications by the MA Workers Comp Rating and Inspection Bureau (WCRIB).
Per the WC Scopes Manual:
Code 5606 is a very restrictive classification which does not apply to any individual exercising direct supervision, even if
that individual is not engaged in construction work. Additionally, employees, officers or members supervising through
subcontractors on the job site do not qualify for assignment to Code 5606.
In order for a person to qualify for the 5606 class, there must be at least one employee between the supervisor-in-question and construction work—even when the work is performed by a subcontractor. If re-classified employees do fit the definition of 5606 (or another more agreeable class code), the available recourse is to dispute the audit results. This is just one example that underscores the importance of having frank discussions concerning employee classifications.
3. Are my subs insured?
Your subcontractors should carry general liability and workers’ compensation insurance—and provide certificates to prove it—before stepping foot on your jobsite (they should sign your subcontractor agreement as well, but that is a topic for another day). Hiring uninsured subcontractors will cost you at audit (for example, an uninsured roofer will cost you $11.44 per $100 paid to the sub); but, why are you picking up subs as uninsured even when you have a certificate on file? Maybe the certificate you have on file is expired, or is simply filled out incorrectly—these subs can easily be removed with current and proper documentation.
Things get a little more complicated when an executive officer or LLC member declines to opt into their workers’ compensation policy and this election is reflected on their certificate. Sole proprietors, executive officers, and LLC members who opt out of workers compensation—despite carrying an active policy known as an “if any payroll” policy—are considered uninsured and will be picked up on your audit unless you can prove they are providing coverage for their workers (such as a copy of their WC declarations page).
Thankfully, recourse for high additional premium charges exists in the form of disputing the results of the audit. Your agent should be working with you to clear up any discrepancies regarding classification codes or uninsured subcontractors, ensuring any improperly applied charges are reversed. The dispute process is as simple as sending a letter to your insurance company (which your agent can/should write) with supporting documentation, such as missing certificates or job descriptions. While disputing the results of your audit can be an effective measure for reducing or removing additional premium charges, your foremost tool for avoiding painful audits is the knowledge of why they happen so you can make appropriate decisions for your business.