An awful lot of the small businesses who desperately reach out to me for help, when they get a Shock Audit for Workers Comp, were assigned through Assigned Risk plans in various states. There’s a reason for that—there are some unique aspects to many Assigned Risk Workers Comp in many states, that commonly contribute to turning Workers Comp insurance into a business-destroying financial bomb.
That’s not hyperbole, either. In my earlier post, I wrote about a Georgia small business that bought two successive Workers Compensation insurance policies through the Assigned Risk Plan in that state, with each of those two policies having initial premiums of $1500 apiece.
That small business employer is now dealing with retroactive bills for over $700,000 in premium for those same two policies.
Now, these kinds of Shock Audits can happen to businesses who get their insurance through the so-called “voluntary market”, too. But there are some aspects of a lot of these Assigned Risk programs that greatly increase the danger for a small business.
What happened to this Georgia employer illustrates what happens to a lot of small businesses who get their Workers Comp through Assigned Risk programs. This was a small construction business, so a lot of insurers weren’t keen on underwriting them in the voluntary market (that is, outside the assigned risk plan) but this employer didn’t understand any of that. The employer just approached an insurance agent and ask for Workers Comp insurance. And the agent provided a policy, at the rather reasonable price of $1500 per year.
What the agent didn’t explain, though, was that these policies were Assigned Risk rather than voluntary market policies. After all, an AR policy is, on its face, pretty indistinguishable from a voluntary market policy. The rates are higher, though, and you lose some discounts available through the voluntary market. But $1500 sounds pretty reasonable.
What wasn’t explained, though, was that this was just the initial estimated premium. Because Workers Comp insurance is always written with an initial estimated premium that is designed to be adjusted later. This is because Workers Comp is priced as a rate times payroll, and initially payroll has to be estimated, subject to later review.
Turns out, that initial $1500 premium was what the insurance industry calls “Minimum Premium”—the minimum premium a policy can be issued for, based on essentially an estimate of zero payroll. But that kind of detail wasn’t shared by the insurance agent when the small business bought the policy.
A lot of small businesses get snared this way by an insurance system that just doesn’t give them the vital information needed to avoid a financial time bomb. And it’s all perfectly legal, all above board, which is why it’s such a common problem.
A lot of folks assume that insurance agents have similar professional standards to the other professional services providers they utilize, like accountants or attorneys. This is not so.
In general, insurance agents are not held to the same kind of professional standards that an account would be, unless the insurance agent voluntarily does something to create a higher duty. The default setting for the professional responsibility of an insurance agent is, essentially, to not steal your money and to obtain the insurance you requested, or explain that they can’t get it. In other words, the insurance agent has to be an honest sales clerk, unless the agent does or says something to create the reasonable expectation that the agent will be acting in some higher capacity.
So an insurance agent can obtain a minimum premium Workers Compensation policy for a customer who has asked for that coverage and as long as the agent doesn’t steal the premium payment or screwed up some technical detail on the application, the agent has met his or her professional duty (again, as long as the agent hasn’t created a higher duty by promising a higher level of service through words of actions).
So some small agents just churn out minimum premium policies, earn a small commission for each, and move on to the next customer. And don’t have any obligation to explain the fine details about how premiums will ultimately be computed and how later on a $1500 policy can turn into a $350,000 bill for additional premium.
An insurance agent generally has no professional duty to act as an advisor to a customer about the insurance sold. If the agent voluntarily offers such advice, he may well create a higher duty for himself, a duty to know what he’s talking about and provide reliable insurance advice, but he isn’t obligated to—and given the tiny commissions earned from an assigned risk minimum premium policy, agents can’t justify spending a lot of time with such customers.
Oh, and with many assigned risk programs, there isn’t much, if any initial underwriting done by the insurance company. That initial $1500 estimated premium just gets pushed through the assembly line, even though often even a cursory examination of the application would indicate that the initial $1500 premium is ridiculously insufficient.
As one insurance company representative said, when he was deposed over these practices, “any errors can always be caught at the audit.” Of course, the audit is only done after the policy ends. That’s why $1500 policies can turn into $350,000 bills.
More to come.