Uninsured subcontractors and the workers' comp premium audit

How the audit works

The premium on your workers’ compensation policy starts as an estimate, based on the payroll you expected. After the policy ends, the insurer audits your records and sets the final premium on the actual payroll.

An Alaska Division of Insurance bulletin lists the records an insurer may ask for. They include the subcontractors used during the policy term, the amounts paid and copies of their certificates of insurance. For each name, one question matters.

If you can, the rule below adds no premium for that subcontractor’s employees. If you cannot, it sets what is added.

The rule behind the charge: NCCI Rule 2-H

In states that use the manuals of the National Council on Compensation Insurance (NCCI), the rule is Rule 2-H, Subcontractors. It is part of the Basic Manual for Workers Compensation and Employers Liability Insurance.

The rule applies where state law makes a contractor responsible for compensation benefits to the employees of its uninsured subcontractors. Our guide to a subcontractor with no insurance covers that liability.

For each subcontractor without evidence of workers’ compensation insurance, additional premium must be charged on your policy. What it is charged on depends on the records you give the auditor.

The payroll goes into the classification that would have applied had those workers been your employees. In the Tennessee order listed under Sources, that was residential carpentry. If you have an experience modification, the factor that adjusts your premium for your own claims record, it is applied to the premium.

The text of the rule that NCCI publishes openly is the 2001 edition, effective 1 July 2001, and the wording may have been revised since. A 2013 Tennessee order and a 2022 Alaska decision both applied Rule 2-H.

A worked example

These figures are before any experience modification. If a certificate covers part of the year, the charge should fall on the work outside its dates. In the Tennessee order the certificates covered two months of the policy year, and the insurer charged for the other ten. The premium audit exposure calculator runs this arithmetic on your own payments, labor share and rate.

What an auditor accepts as proof

Rule 2-H names three documents:

• a certificate of insurance for the subcontractor’s workers’ compensation policy
• a certificate of exemption
• a copy of the subcontractor’s workers’ compensation policy

The test is insurance in force for the work, so compare the policy dates on the certificate with the dates the subcontractor worked. A policy period that begins after the subcontractor started, or ends before the job did, leaves that stretch of work without evidence. One insurer’s audit fact sheet adds that it will not accept a handwritten certificate, or one whose policy number reads TBD.

The certificate of exemption is where states differ. Tennessee keeps a public registry of exempt construction business owners, and says exempt owners must still insure all of their employees. In a 2022 Alaska appeal the insurer argued that Alaska has no procedure for such a certificate, so a contractor there has to show insurance. When a subcontractor hands you an exemption, or a policy written for an owner with no employees, ask who else worked on the job. Our guide to ghost policies covers that case.

A signed subcontract is not on the list. In that Alaska appeal the contractor produced one and argued that the subcontractor was independent. The charge stood.

Common mistakes

What to do 60 days before the policy year ends

A missing certificate is easier to get from a company you are still paying.

• List every subcontractor paid during the policy year, however small, with the total paid and the dates worked.
• For each, confirm the workers' compensation certificates cover every date worked, renewals included. Do the same for general liability.
• Check that the insured named on each certificate is the company you paid.
• Ask the subcontractor or its agent now for anything missing.
• Get the state exemption document for each exempt owner, where the state issues one, and note whether helpers worked.
• Where there was no coverage, ask for the subcontractor's payroll records, or gather the invoices that show the labor amount.
• Estimate the possible charge and tell your broker before the audit.

There is a one-page version to print: the premium audit preparation checklist. For next year, WatchMyCover emails each subcontractor before a policy ends, once you switch that on.

Disputing a finding with a certificate found later

An audit bill can be revised. In the Tennessee order the contractor sent certificates after the first invoice. The insurer reviewed them and billed again, for only the ten months they did not cover.

One insurer’s fact sheet gives policyholders 15 days from the date of the final audit billing to dispute the findings or ask for a revision. It also asks for a missing certificate to be sent quickly.

So send a late certificate to your broker or the insurer’s audit department at once, and ask in writing for a revised audit. Check each subcontractor line on the auditor’s worksheet against your list.

After that, the route and the deadline depend on your state and your policy. In the Alaska appeal the contractor went to the insurer’s audit manager, then to NCCI. From there it went to the grievance committee of the Alaska Review Advisory Committee, then to the Director of the Division of Insurance. The Tennessee order put the burden on the contractor to prove the subcontractor should be left out.

Ask your broker for the deadline the day the bill arrives, and whether the disputed amount is due in the meantime. For a large bill, talk to a construction attorney.

The general liability audit

A general liability policy can be audited too. The test there is whether each subcontractor was adequately insured.

In the pricing rule as IA Magazine quotes it, the classification that carries the rates for subcontracted work applies to operations performed by adequately insured subcontractors. Operations by subcontractors without adequate insurance are classified and rated under the classification for each operation. Your insurer sets what counts as adequate, before the policy starts.

One insurer’s fact sheet uses the total amount paid, materials included, for an insured subcontractor. For an uninsured one it applies its workers’ compensation rules for uninsured subcontractors. It also states the lowest limits it accepts on a subcontractor’s policy.

Ask your broker for your insurer’s criteria in writing, and set the limits you require of subcontractors at or above them.

This page is general information about practice in the United States, not insurance or legal advice.