Few things are more frustrating than getting an unexpected premium bill after a workers’ compensation insurance audit. After all, you don’t have piles of cash lying around – and if you did, they wouldn’t be earmarked for surprise insurance bills.
Workers’ compensation audits are designed to make sure you’ve accurately reported payroll and correctly accounted for your 1099 workers. If your insurance company discovers discrepancies during audit, you may receive a refund or owe additional premium.
No one looks forward to premium audits, but there is good news. There are steps you can take to reduce the risk of unexpected bills and make cooperation with your insurance carrier a breeze during audit.
How a workers’ comp audit works
Your workers’ comp carrier conducts annual audits to verify that the information their policyholders provide is accurate. In the construction industry, contractors are used to getting audited pretty much every year due to fluctuations in employees, subcontractors, and workload.
During an audit, the insurance company will review your expense records, job class codes, and all subcontractor COIs to ensure you’re paying the right premium for your actual payroll and risk exposure.
What happens if you’re missing a subcontractor’s COI?
If you’re missing a subcontractor’s COI, you’re on the hook in more ways than you want to be.
- Your work comp company may charge you additional premium, even if your subcontractor is a sole proprietor that is not required by state law to have work comp insurance. This is true in most states – Missouri, Florida, California, and more.
- You could be legally liable for your subcontractor’s workplace injuries. Contractors are in a complicated position when it comes to risk. If you hire subcontractors without proper workers’ comp insurance, you could be responsible for incidents and claims, including medical bills.
There is just too much risk involved in not keeping proper records. We highly recommend taking steps now to avoid surprise premiums or legal surprises.
7 tips to avoid a surprise premium bill during audit
So, how can contractors be proactive with their records and avoid unexpected bills? Here are seven tips.
1. Keep detailed payroll and expense records for your employees and 1099 workers
Accurate, up-to-date, and detailed records are crucial to avoiding a headache during an audit. Make sure each employee and 1099 worker is designated in the appropriate class codes in your accounting system. Misclassifying employees can lead to incorrect premium calculations and possible penalties.
2. Transfer risk with insurance requirements
When hiring subcontractors, it’s essential to have clear insurance requirements in your contracts or agreements. These requirements transfer risk from your company to the sub. At minimum, you should always require subs to carry their own general liability and workers’ compensation policies, and provide you with valid Certificates of Insurance before starting work.
3. Get updated COIs
Are there a few subcontractors you absolutely love working with? Lucky you! But don’t put trust above good business decision making. COIs often have multiple expiration dates for different coverages. Do not hesitate getting renewals. Things happen. Businesses close. Policies lapse. Stay diligent to avoid massive additional bills after an audit.
4. Verify the info on the COIs
When you receive subcontractor COIs, take the time to review the information and compare it to your requirements. Check that the sub’s name is correct, the coverage dates haven’t expired, and that the required endorsements are there.
5. Keep an organized system for tracking COIs
When an auditor comes knocking, the last thing you want to do is scramble for the proper documentation. If you work with more than about 10 subcontractors, you need some sort of system to track and manage COIs. Technology is your friend in this area!
>> HoundDog users can download subcontractor COIs for a given date range with one click. Schedule a demo to see it in action.
6. Hire subs you trust
Collecting COIs and other documentation is vital, but nothing can replace a business owner’s instinct. In addition to the tips above, it’s wise to work with subcontractors you trust. Vet them, check their references, and make sure they have a track record of maintaining proper insurance coverage.
7. Conduct internal audits
As a contractor, you know it’s not if you get audited, but when. Performing regular internal audits can help you prepare by identifying and addressing discrepancies. Sure, it’s extra work. But being proactive can save you headaches and money later.
Avoid surprise premiums with automated COI tracking
Managing compliance documents isn’t anyone’s favorite pastime, especially contractors with long to-do lists. However, it’s essential to avoid unexpected premium bills during inevitable workers’ comp audits.
That’s why we created HoundDog, a simple platform that automates the entire Certificate of Insurance verification and tracking process. We work directly with your subcontractors to get compliant COIs on file quickly, so you can get started on your next project.
>> Want to see it in action? We’d love to show you. Schedule a 20-minute demo today!
