How to Recover Overpaid Premiums

In our last two articles, we looked at ways you can control your workers compensation claim costs after an injury has occurred. This month, we’re going to take a look at the largest piece of your Total Cost of Risk: workers comp insurance premiums.

It may come as no surprise that roughly 40% of all workers compensation insurance policies charge too much premium. But you may be shocked to learn that you can actually recover that excess premium from the insurance carrier.

To understand how premium overcharges occur and which tools you may use to recoup those amounts, it’s first necessary to review how a workers comp insurance premium is calculated. It’s calculated as Payroll x Rate = Unmodified Premium x Experience Modification Factor = Premium. The actual amount you pay is then subject to various credits and debits, but this formula is the basic calculation where the majority of the errors occur.

Payroll Errors = Premium Dollars

The National Council on Compensation Insurance (NCCI) and other state rating bureaus provide the definition of “payroll” for purposes of the workers comp premium calculation. “Payroll” doesn’t mean just the money paid to an employee for a day’s work. It also includes many other forms of remuneration such as stock bonus plans or draws against commission.

Similarly, there are at least 13 deductions that may be excluded from “payroll” for purposes of calculating a workers comp premium. Most employers are only aware of two: overtime and corporate officers’ salaries. As a result, the payroll amounts being used to calculate a premium may be mistakenly overstated.

We worked with a Chicago manufacturer who was concerned when it received a request from its insurance carrier for a large amount of additional premium. It turns out that the reported payroll records included an extra pay period. Computer software programs used by the insurance carrier don’t know that only 52 weeks should be included in a payroll period, so the report mistakenly picked up an additional two-week pay period. Discovery of the error resulted in the company being overcharged approximately $33,000 for one year of workers comp premium.

Wrong Classification

The workers compensation classification system groups together similar types of employers based upon their common job exposures. The more dangerous the job duties, the higher the business’ class code rate and the more expensive the premium becomes. This is the “rate” component of your premium calculation.

Proper classification of an employer’s business can save thousands of dollars in workers comp premium. However, the overall system of classifications is very complex, and the use of the wrong workers comp code is very easy.

In one instance, a medium-sized company was overcharged when the insurer assigned an incorrect, more expensive class code. The wrong class code was used to calculate premiums for 5 years before it was caught, and as a result, the company overpaid the insurer $606,524 in premiums.

Inflated Experience Modification Factor

Your Experience Modification Factor is a kind of benchmark that shows whether your claims experience is greater or less than other companies similarly situated to you. In last month’s column, we addressed how unnecessarily high reserves will inflate your Experience Mod. One error in the Mod calculation can result in years of problems.

For example, a business’ NCCI Experience Rating Worksheet listed one claim at the exact same amount for three years. Looking into the circumstances, we discovered that the claim had been closed with no payment, yet it was never corrected with the NCCI. If this hadn’t been uncovered, it would have resulted in $15,000 in excessive premium.

How Audits Can Help

As an employer, you are responsible to ensure the accuracy of your workers compensation payroll, your rating and your experience mod — a daunting task. You cannot rely upon the annual audit by the insurance carrier, because they typically don’t have the time or resources to identify the problems.

A professional audit of your workers comp premiums and claims history can help catch any premium calculation errors that occurred in the past. You can very often recover those premium overcharges.

Independent premium audit service firms, such as Chicago-based AuditRate, will identify the errors, and also act as your advocate with the NCCI and the insurance carrier to recover premium overcharges going back several years. More importantly, a professional premium audit will help prevent the errors from being repeated in the future.

Bobette Puckett is a comprehensive insurance architect and the executive vice president of Alper Services. A veteran industry leader, she designs creative solutions through innovative programs and services that help clients manage risk and increase profitability. She can be reached at (312) 867-7351 or