At the end of every workers’ compensation policy term, an insurance carrier will conduct a final premium audit. The audit is based on the policy’s Named Insureds and the actual payroll, operations and job classifications for the expired coverage period.
During the policy year, small businesses may experience changes in staff, operations and perhaps even leadership. It is important for small business owners to communicate those changes to their agent and workers’ compensation insurance carrier as they occur.
Some Common Changes Affecting Premium and Coverage
There are several common changes small businesses can make that can cause an increase or decrease in the final premium.
- Payroll Changes. By far, unreported payroll changes are the top reason that businesses may owe additional premiums at the time of the insurer's final premium audit. Owners might add staff throughout the year, thus increasing their payroll, but neglect to notify their insurance carrier of these changes. Workers’ compensation premiums are based on payroll and the workers’ compensation class codes assigned to employees, so any staff additions or subtractions can have a financial impact. The simplest way owners can avoid unexpected changes in billed premium costs due to staff changes is to update their payroll estimates with their workers’ compensation insurance carrier at each renewal and as changes occur during the policy period.
- Operational Changes. Changes in operations can mean a change in premiums. When a small business changes what it does, it could impact the workers’ compensation class codes applied to their employees. As a result, premium rates could change if there are new class codes. For example, a warehouse operation that decides to open a retail store within its confines or a restaurant that decides to add delivery service will likely see their premium change. That is because some or all of their employees will be performing different tasks requiring a different mix of assigned class codes. To help avoid surprises at the end of your policy term, notify your insurance agent and carrier as these changes occur.
- Entity Type Changes. Any change of entity type must be reported to the insurer on or before the date the event occurs. This type of change occurs when a small business restructures its operations and changes its entity type. Take for example a sole proprietorship that incorporates. There are specific, but widely varying laws in every state that mandate whether principals of a corporation are mandatorily subject to workers’ compensation coverage, are exempt from coverage, or have the ability to reject coverage. In certain states, a sole proprietor is exempt from coverage, but upon incorporating becomes subject to coverage and a premium charge.
While certain changes such as those listed above can impact workers’ compensation premiums, other changes such a change in ownership may actually impact the continuation of coverage:
- Ownership Change: A change in ownership can have broader implications than just a premium change. It is critical that all material ownership changes be reported to the insurer on or before a change in ownership occurs so that the carrier can review all relevant facts and make sure proper coverage is in place going forward. A material change occurs when there is more than a 50% transfer of ownership for any one Named Insured. In most cases, new owners cannot assume the prior owner’s existing workers’ compensation policy and they must obtain new coverage.
When it comes to avoiding surprises with insurance coverage and premiums, much of the responsibility is on the policyholders. Small business owners should report changes in payroll, locations and operations to their agent and insurer as the changes occur.
To be proactive, regularly speak with your insurance agent regarding your workers compensation exposures and coverage throughout the year.
Recap: Tips to Help Avoid Unexpected Workers' Comp Premium Costs and Coverage Changes
- Update payroll estimates with workers’ compensation insurance carrier at each renewal and as changes occur during the policy period
- Notify your insurance agent and carrier as operational changes occur
- Report to the insurer on or before the date any entity type change occurs
- All material ownership changes reported to the insurer on or before a change in ownership occurs
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Six Common Questions About Workers' Compensation Insurance
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