Preparing for your HFH Workers Compensation Premium Audit

Lockton Affinity

Chubb Group of Insurance

Companies

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A premium audit is a review of policyholder’s records

and operations to ensure that the exposure information

is accurate. A policy is written using an estimated basis

of premium such as payroll. An audit is performed after

the policy expires to gather actual payroll. The actual

figures are used to correctly adjust the premium for the

commercial insurance coverage.

What is Premium Audit?

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Why is a premium audit mandatory?

State laws and statutes require an insurance carrier to

audit all Workers Compensation policies. The premium

audit format is based on jurisdictional requirements, as

well as the size of the policy and/or the nature of the

operations.

The audit may be completed in one of two ways.

• Telephone Audit

• Physical Audit

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Telephone Audit

A Chubb telephone auditor will complete telephone

audits. The audit contact will receive an email from

“chubbtelephoneaudit@chubb.com” to schedule a

date and time for the phone audit.

Forms requesting payroll and information about the

operations will be attached to the email. The forms

should be completed and returned to the general

mailbox or auditor at least a day prior to the scheduled

appointment.

Note: Please add the above email to your address book to avoid it

being perceived as spam or junk mail.

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Physical Audit

Generally conducted on site or at an appropriate

secondary location (e.g. accountant’s office). This audit

may be performed by a Chubb auditor or by an

independent audit company hired by Chubb.

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Premium auditors gather information from books of

original entry and verification from tax documents. The

records required for the audit depend on the type of

coverage on the policy. In order to take advantage of

possible premium reducing credits, records need to be

clear and concise.

How to prepare for the audit

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Payroll Audit

A payroll audit is conducted for workers

compensation policies. The auditor will look for

records that reflect:

• Total Gross Payroll / Remuneration

• Employees by name with job duties and

working state

• Documents maintained to show payroll

categories separately

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Payroll Categories

Gross Payroll / Remuneration

• Including pre-taxed deductions under 401K & Sec 125

Possible Deductions (if shown separately in the records)

• Overtime / Doubletime (not excludable in DE, NV, PA)

• Severance Pay

• Taxable Group Term Life

• Third Party Sick Pay

• Sec 125 (excludable in CA & OK only)

• Unanticipated Bonuses (excludable in TN only)

• Vacation, Sick & Holiday Pay (excludable only in KS, SD )

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Executive Officers, Partners and Members/Managers of an LLC

Payroll limitations may apply to Corporate Executive

Officers, Partners and Members/Managers of an LLC.

Records must reflect the payroll/remuneration for these

individuals separately. Corporate By-laws may be used

to verify Executive Officers, Partnership Agreements to

verify Partners and Articles of Organization to verify

Members/Managers of an LLC.

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Employee Classifications

8810 Clerical Office Employees (0953 DE & PA)• Applies to office employees with work stations physically

separated from the operative hazards (stores, yards, warehouses, construction sites) by floors, walls, partitions, counters or other physical barriers. These employees work in the office and do not travel on a regular and/or frequent basis as part of their normal duties.

8742 Salespersons, Collectors (0951 DE & PA)• This classification applies to employees who perform duties away

from the employer’s premises. This code does not apply to employees who deliver merchandise or use vehicles to deliver or pick up goods.

• The Executive Directors normally fall within this category if their duties take them out of the office for public speaking engagements and/or fundraising activities.

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Carpentry Classifications

5645 “Carpentry – Detached One or Two Family Dwellings” (TX 5403, DE & PA 0652)• This classification includes erection of the sill, rough framework,

roofing, wallboard installation, lathing, windows, stairs, finished flooring, cabinet installation, fencing, decking and all interior wood trim work when performed by employees of the same contractor.

Code applies to rehabs as well.

5403 “Carpentry NOC - Commercial & Dwellings over 3 Stories in Height” (0651 DE & PA)

5651 “Carpentry – Dwellings 3 Stories or Less” (CA 5645, DE & PA 0642, TX 5403)• Applies to attached dwellings, (i.e.. Apts, Condos, Triplexes)

Additional construction classifications may apply to employees or uninsured subcontractors depending on the type of worked performed.

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Construction Managers

5606 “Contractor-Project Manager, Construction Executive,

Construction Manager or Construction Superintendent”

• This classification applies to project managers, construction

executives, construction managers, or construction

superintendents having administrative or managerial

responsibility for the construction or erection project. This

code does not apply to any person who is directly in charge of

or who is performing any degree of actual construction work.

• CA Bureau must approve this code prior to use of this

classification code.

On site construction supervisors do not qualify for this classification.

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Mercantile Operations

Classifications for mercantile businesses are based on the type of merchandise sold. If a store sells several types of merchandise, each of which may be subject to a different classification, the store shall be assigned on the basis of the principle category of the merchandise sold. (51%).

Be prepared to provide the auditor with a breakdown of merchandise sold and percentage of sales by category. • Building materials / home improvement items

• Clothes

• Kitchenware

• Furniture

• Knickknacks

• Appliances

• Other Misc

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Store Classifications

8017 “Store: Retail NOC” (0928 DE & PA)

• Applies to retail stores that are principally engaged in selling merchandise that is not described by a specialty retail store classification.

8058 “Building Material Dealer – New Materials Only: Store Employees” (CA 8017,HI 8010, NJ 8032,NY 8232, DE 0935,0935 PA),(8058 applicable in MI, TX & OR) for New and Used Material.

8232 “Building Material Dealer – New Materials Only: All Other Employees & Yard, Warehouse, Drivers” (MI&OR) New and used Material. (TX 8234) (DE& PA 0855)

8204 “Building Material Yard & Local Managers, Drivers” (n/a OR),(DE/PA) 0860,(MI 8107),(NY 8263),(TX 8234),(OR 8232)

• Applies to used or new and used building materials.

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Drivers

7380 “Drivers, Chauffeurs, Messengers, and Their

Helpers NOC - Commercial” (N/A: AZ, CA, NV, DE, PA)

• This code applies to employees who engage in duties

on or in connection with vehicles and includes drivers,

chauffeurs, messengers, drivers’ helpers, garage

employees, stable hands, and employees using bicycles

in their operations.

• This classification applies when the store classification

does not include drivers.

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Workers Compensation rules and/or state statutes

require that the payroll or contract amount of

subcontractors be included within the premium

calculations in the event that such subcontractors do

not provide satisfactory evidence of Workers

Compensation coverage during the policy period.

Satisfactory evidence includes:

• Certificate of Insurance for the subcontractors Workers

Compensation policy valid during HFH audit period

• Certificate of Exemption (for approved states only)

Subcontractors / Independent Contractors

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Satisfactory Evidence of Workers Compensation Coverage

Auditor will review the cash disbursements journal or general ledger to obtain a list of subcontractors used during the audit period.

Certificates of Workers Compensation insurance or state exemption forms will be reviewed to verify coverage.

• Best Practices: Upon hiring of subcontractors, HFH should obtain WC certificates and/or signed exemption forms prior to work being done. Prior to the scheduled appointment date, the audit contact should review the list of subcontractors used during the audit period to ensure that satisfactory evidence was obtained. This will avoid unnecessary inclusion of subcontractors in the audit. State statutes should be reviewed to determine if exemption forms are acceptable in your state in lieu of a Workers Compensation insurance certificate.

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Certificate of Insurance

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Keys to a Smooth Audit

Decide who should be the primary contact. This should

be a person who is familiar with the work done by all

departments and employees.

Review your payroll documents to assure that the auditor

can break out the categories of payments and separate

the employees by job duties and the state of employment.

(i.e. QuickBooks summary, ADP payroll registers).

Have satisfactory evidence of workers compensation

insurance available for subcontractors.

Review the audit findings with the auditor.

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Questions

Please contact the auditor prior to the scheduled

appointment if you have any questions.

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This presentation is general in content and intended to

provide an overview of How to Prepare for a Premium

Audit and has an edition date of March 2011. This

document in advisory in nature and is for informational

purposes only. The information provided in this document

should not be relied upon as legal advice or a definitive

statement of the law in any jurisdiction. For such advice,

seek legal counsel.