Should you get an apology from your insurer and money back?
Money and an apology from your insurer are not quite as unusual as you might think. Well, an actual apology is unlikely but money is very likely in a cost recovery (CR) process, which is becoming a common way of reducing overall insurance costs.
Workers Compensation (WC) Insurance CR is the process of finding errors in the intricate calculations of a company’s WC insurance premium. The process is so complicated it usually requires highly trained outside specialists. It is generally accepted that for a particular policyholder there is a 75% chance that errors occur. This high error rate is at least partly due to the fact that each of the 50 state agencies as well as the National Commission on Compensation Insurance have a say in making the rules for charging premium. Correcting the errors usually results in insurers issuing checks back to the policyholder for the erroneous charges.
The rate of error has grown over recent years due to a combination of increasing complexity of the laws and rules and increasing computer automation. Although counter intuitive automation means potential for humans detecting errors is reduced. There is little incentive for the insurers to design the soft ware to pick up and correct errors that when corrected reduce revenue to insurers.
It’s tedious reading to describe the premium calculation, so suffice to say that the rules cover paid and reserved WC claims and payroll classifications combined to develop experience modification and conversion factors, state tax surcharges, policy endorsements, discounts and credits determine the final premium. There are over 40 components in the calculation and a typical CR can go back 6 years.
The process is simple; the policyholder provides a few documents including the policy and recent audits to the CR firm. Usually it’s not necessary for the policyholder to be involved again until there is notice from the insurance company if recovery is available.
$10,000 from an insurer is fairly typical for a program of $100,000 annual premium (AP). This is 10% of the AP and is typically on the low side. Therefore, any such program is usually worth the effort of going through the recovery process. Generally recovery experts do not charge unless they obtain a recovery and then their fee is a percentage of the recovery.
Will your broker do this? Sometimes a broker performs the CR review but many brokers are reluctant to do this because the commission rates are so low on WC insurance (about ¼ of other business lines of insurance). They would prefer to focus on other higher commission service. Brokers would not typically do it on a contingency fee basis because clients think such service should be provided as part of the commission. When a broker does provide CR all but the largest usually out source the work to a CR firm.
In summary it makes good sense for a CR review every 5-6 years. There is little down side as there is no cost to a company to start the process and there is a significant upside. The upside includes money back and savings going forward as such errors gone undetected unnecessarily increase the cost of the insurance.
