The Workers' Compensation Crisis; The Hidden Truth 3

Saturday, January 3, 2004 | 0

The Men in Black

Part 3 in a 5 part series

In the second article of this series, we discussed three keys to significantly lower your workers' comp premiums. We uncovered how few insurance brokers actually know and use these three strategies.

We also talked about a system that is set up to disincentive the broker from saving employers money. I think the commission structure is set up backwards, instead of paying more commission as the premium increases, the broker should earn more by reducing the costs. Tell me, why would a broker save his client money when it's coming right out of his own pocket?

This brings us to our third article in this series. 'Hidden Truths' are what few know about and even fewer talk about. As your guide in this article, it's my job to explain what I know to be true and what I've been told is the truth. You'll need to make your own mind up as we embark on this journey.

The Hot Key

One of the three keys discussed in the last article generated a lot of questions from the readers here. This 'hot key' deals with the final audit the carrier conducts to determine the actual workers' compensation premium. It appears that someone is not doing their job by educating their clients on how this process works. So we'll do the job for them and even go one step further today as we have prepared a BULLETPROOF AUDIT KIT, yours free for the asking. After reading this article, you'll want all the help you can get.

64% of 'Audited' Audits Contain Overcharges

That's a staggering statistic, but premium review experts who look for overcharges claim it to be true. Depending upon whom you speak with, the amount of the average overcharge can vary. The range is from 8% of premiums to 20% of premiums. For an employer paying $100,000 in annual workers' comp premiums, that's $8,000 to $20,000.

The laws in some states allow the employer to go back for three years plus the current policy year. That could mean $80,000 in premium refunds for an employer who pays $100,000 a year.

The number of overcharges isn't as high in California as it is in other parts of the country, California does not allow as much leeway as others do. From my personal experience, we find errors 1 out of 5 times or 20%, which is still odds that I wouldn't want against me on my policy. The errors we find range from the obvious, like adding on three zeros at the end of a number, to the not so obvious like a reclassification from one class code to another.

Certain industries need to be careful, here's a short list:

* Contractors
* Carpenters
* Plumbers
* Electricians
* Colleges
* Bottlers
* Convalescent homes
* Nursing homes
* Machine Shops
* Hotels
* Iron or Steel
* Roofers
* Temp Agencies

$4,500,000 Income in Only 10 years!

A friend of mine in North Carolina who 'audits the audit' for employers all over the country has returned over $15 million in premium overcharges to employers who hire him. He charges a percentage of what he gets back for employers to provide this service. I never really thought about this, but even if he gets 30% (which is low) of what he saves employers, he's made $4.5 million in the last decade. James, next time you're buying lunch!

The Premium Audit as a Profit Generator

One premium refund specialist claims that while he was in Vegas at the Premium Auditor Association's Annual Convention (say that five times fast) that the inside joke was how the premium audit department was being called a 'profit center'. Supposedly, the premium auditors were boasting about how they contribute to the insurance company's overall profitability.

If this is true, it sure sounds like insurance fraud to me. If it's a felony for an employer to underreport or hide payroll for the purposes of not paying workers' compensation premiums then it should be the electric chair for an insurance company who fraudulently overcharges unsuspecting employers!

One can't argue that the insurance companies have not done a very good job of educating brokers, policyholders and others outside the industry on how premiums are developed and calculated.

Blame it on the System

The classification and workers compensation rate-making system involves a very intricate set of rules, classifications and procedures governed by a rating bureau that is funded by and controlled by guess who? The insurance companies.

Depending upon the state you're in there are approximately 400 to 800 different classifications that are used. Since there isn't much oversight, the system lends itself to maximizing premium dollars.

According to the same industry expert that was in Vegas, carriers are known for continuing to apply the wrong class code after learning they've been using the wrong one. It isn't until someone yells loud enough that anything is typically done about it. Do you think the insurance company at this point, now fully cognizant of their error, notifies everyone else affected and promptly mails out return premium checks?

Somehow I doubt it.

The Men in Black

The same friend who's making millions in this business, also tells me stories about the 'Men in Black'. If next time the payroll auditor from your insurance company shows up looking like Will Smith or Tommy Lee Jones, you know what he's telling me is true.

From what I'm told, there have been some insurance company executives that when the pressure gets to be too much to hit certain numbers, they will employ certain methods (ie, The Men in Black) to help them get done what needs to get done. I'm told that they are like hit men, except they are called 'special contract auditors' and literally will fly out to audit the payroll records of unsuspecting employers, dressed in all black, with their black Ray-Bans on and carrying sleek titanium briefcases.

Now, I'm not saying this is true because I have no actual evidence to back this up, but the fact is that this could generate millions of dollars for an insurance company in a relatively short period of time by fiddling with the final audits. You would only have to overcharge 200 policyholders $5,000 each to net a cool million. But that's small potatoes for The Men in Black; from what I'm told they pop employers for $50,000, $100,000 and even more. Get $50,000 from two hundred employers and we're talking about some big money: a whopping windfall of $10 million.

Here's the thing, the chances are very good that no one would ever be the wiser. If an employer, such as you, ever was to find an error like this, the insurance company would say, "oh, we're sorry" and could promptly issue you a refund check, and that would probably be the end of that.

The Secret Alliance of Premium Auditors

There's a small handful of companies scattered around the country that specialize in finding and getting premium refunds for employers. Insurance companies DO NOT like these people for a number of reasons, but mostly because they may have to pay a lot of money back in some cases.

Awhile back this industry got a bad name for itself, as there were stories of how some premium review companies would coax employers into lying about the operations of their company. They would then get the business reclassified to a lower-rated class code and demand a premium return from the insurance company. Now whether or not this really happened to the extent it was reported to, we don't know, or maybe it was the insurance companies planting these stories to scare everyone away from hiring a premium review company.

Either way, you don't want to ever lie about your classifications, operations, hide payroll, etc. Insurance companies do not take this lightly. Heaven forbid someone actually commit fraud. Funny how they don't take that same attitude on claims. We'll save that one for the next edition of "The Hidden Truth".

For those of you in California, my search came up empty as I tried to find a reputable firm. The better firms are all back east and even though they say that they know California, the ones I talked to really don't. California has its own rating bureau and system, separate from everyone else. There are some major differences between NCCI rules and WCIRB rules especially in the area of classifications. Make sure to request your free BULLETPROOF AUDIT KIT and call me if I can be of any assistance.

If you do happen to find a reputable firm, they will require quite a bit of information and may only work with you if you are in one of the industries they specialize in (i.e. is more prone to be overcharged). A fair amount of work can go into auditing an audit and usually they set up their fee structure so that they get 50% of whatever overcharges they find.

What's funny is that in reviewing the websites of these companies none of these companies mention ever working as an auditor in a previous life for an insurance company, which doesn't make sense to me. My friend taught himself while he was adjusting claims for an insurance company in Florida by studying the manuals himself, once they found out what he was doing, they weren't happy, they told him to get back into his box and to stay there.

So where do the insurance company auditors go when they retire? Heaven knows I've seen a couple that definitely need to retire; is there some kind of Secret Alliance of Premium Auditors and a secret pact we don't know about?

Just as any industry has associations, so do payroll auditors. I've not been to any of their meetings, but my friend in North Carolina has. He tells me about how he used to sneak into their meetings and blend in. It didn't take long until they found out he didn't work for an insurance company and they were not happy. A bald man who was behind a black curtain suddenly appeared and took him by his arm and escorted him out.

Brent Heurter is the Founder and CEO of ClearComp, a cost-free solution for guaranteed comp savings and President of Pavlo, Weinberg & Associates, Insurance Brokers. Brent can be reached at 888-CLEAR-89 or brent@clearcomp.com.



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The views and opinions expressed by the author are not necessarily those of workcompcentral.com, its editors or management.