Assigned-Risk Premium Collections

The Commonwealth of Virginia began requiring and regulating workers’ compensation insurance in 1918. Since then, the Commonwealth has bit-by-bit developed a more comprehensive regulatory system in light of rises in work injuries, workers’ medical bills, and law suits against employers as well as changes in industry and technology. That statutory scheme now generally requires employers of two or more workers to carry state-recognized workers’ compensation insurance. Corporate officers and LLC managers (even if not performing regular work or earning salary) are to be counted as workers in determining whether coverage is required, along with family members performing work for the company, immigrants, temporary, seasonal and part-time workers, minors, and even workers that perform work for churches, charities and non-profits. Notably, subcontractors performing the same trade or fulfilling a contract are also included in counting employees for coverage requirements.

Following the obligation to carry coverage, significant penalties may apply to any employer failing to maintain coverage. Under Virginia Code § 65.2-805, an employer that fails to carry insurance if required can be assessed a civil penalty of up to $250 per day for each day uninsured, up to a total of $50,000.00 plus costs. If an employer knowingly and intentionally fails to carry workers compensation insurance when required, Va. Code § 65.2-806 states that such employer is guilty of a Class 2 misdemeanor. These statutes can quickly become a concern for an employer who has failed to insure as reports become required if or when an injury occurs. Layering on top of the previous consequences an errant employer can find themselves facing, Va. Code § 65.2-902 provides civil penalties for failure to make required reports (eg. First Report of Injury / “FROI”, Subsequent Report of Injury / “SROI”, and any other transactions requested by the Commission). This civil fine is to be not more than $500 for each failure but may escalate up to $5,000 if the failure is willful. These obligations and penalties make compliance, including payment of premiums when due, a strong interest of the employer.

Despite this strong compliance interest, some employers for one reason or another appear to be risky investments to insurers and are thereby often unable to qualify for workers’ compensation insurance on the voluntary market. If the risky-investment employer is to comply, that employer must resort to the state-sponsored residual market, or assigned risk pool. Companies – insurance companies included – operate at a most basic level to earn a profit. Insurers normally only want to underwrite policies which are expected to be profitable. In the assigned-risk pool, the countervailing interest of profit motive runs into the risky-investment employers’ compliance interest.  Resolution of those two competing interests is met by force of law: insurers in the assigned risk pool are compelled to provide insurance policies to higher-risk insureds counter to that most basic corporate interest, and as already stated, most employers are required to carry workers compensation insurance coverage. The assigned-risk pool then involves a series of forced relationships.

Among this statutorily-created context are the workings of particular insurance policies. Under those policies, premiums due over the period of coverage are estimated at the out-set of the policy based upon information provided by the insured, but such premiums are subject to audit during or after the coverage period to ensure that the premiums correspond to the actual risk or exposure of the insurer. The audit acts to protect the insurer’s forced investment. At policy outset, the insured classifies each employee that it employs with a three- or four-digit code created by the National Council on Compensation Insurance (“NCCI”), who is Virginia’s assigned-risk pool organizer. Those codes signify the degree of risk and type of hazard each job may involve, assign values based on those factors, and enable the insurer to assess the cost of workers’ compensation insurance. Premium rates are more expensive for more dangerous employment types and for areas of business with higher occurrences of injury claims. Insured’s are contractually required to cooperate with audits by the insurer. Audits commonly occur at policy end or within three years afterward. However, audits may occur at the insurer’s discretion and can be performed by an auditor through either on-site inspection of records, in-person meeting, telephone, mail correspondence, or a combination of such manners. Generally, the audit seeks to produce an audit report in which it confirms any difference between the initial exposure estimates and the ultimate actual exposure. In performing this review, the auditor may review such documents as sales counts, service agreements, contracts with sub-laborers, journals, ledgers, payroll records, other financial statements and tax records.

If the actual exposure was more than the initial estimated exposure, the insurer can charge an audit premium. Sometimes substantial audit premiums result when either (a) the insured misclassifies employees, (b) the audited exposure otherwise exceeds the amount initially represented by the insured or (c) an insured fails to comply with an audit and the audit is closed as estimated based on information available to the insurer.

If the insured then fails to pay for its insurance, the policy can be cancelled, the insurer may report the unpaid balance to the state-recognized assigned risk pool organizer which may prevent the insured from obtaining new insurance, and the insurer may seek to collect the unpaid premium by collection action including litigation. All the while, the insured remains required to obtain and maintain insurance coverage if it continues business operations. The statutory obligations and penalties here make assigned-risk premium debt unlike much other commercial debt. Strong pre-litigation considerations benefiting creditors must still be gauged against the insured company’s actual ability to make payment upon the debt. In our practice area of commercial debt collections, Shenandoah Legal Group, P.C. assists assigned-risk insurers with recovering on unpaid insurance premiums and we have developed experience in negotiating with defaulting assigned-risk insureds. In the event litigation is required, our firm has experience in obtaining judgment for unpaid audit premiums and using post-judgment collection remedies to further enable insurers to recover.