The auditor will ask a number of questions about your business entities, ownership percentages, operations, changes in your operations, and the states in which you’re operating.
If your operations have experienced a temporary increase in work due to a one time job, you need to let the auditor know so that a note to the file can be made. Otherwise, once the underwriter reviews the audit, the underwriter may want to increase the projections on your current policies which would result in a mid term additional premium endorsement that isn’t justified.
The auditor will want to know the type of work performed by each employee and uninsured sub. Just because your records have the job description or the classification code of an employee or sub pre labeled does not mean that the auditor will blindly accept this. The auditor may ask follow up questions about the employee or sub to make sure that he agrees with your classification. As we’ve discussed in other videos, classification can be tricky.
The two biggest classification problems experienced by builders are the proper use of the residential carpentry and executive supervisor class codes. Some auditors take the position that they want to get as much premium as possible for their insurance carrier. As a result, they may look to enforce the classification rules to the letter of the law even if they seem unfair to the builder.
Residential carpentry is generally a very expensive class code for Workers Compensation. The National Council On Compensation Insurance (which is knows as NCCI) has a classification rule which indicates that residential carpentry is to be used by an insured that is a general contractor for all of the carpentry operations at a jobsite including framing, siding, roofing, interior trim, wallboard, and hardwood floor installation. Also, the governing classification rule says that residential carpentry must be used for inside cleaning and yard debris removal in most cases. If you did not deduct the proper rate for these types of uninsured subs, you’ll be in for a rude shock upon receiving your final audit bill. Not all carriers follow the strict NCCI rules but you need to be aware of how your carrier will handle this situation to prevent a problem on your audit.
Lets shift attention to the classification code for executive supervisor. This is a favorable class code for an owner of a building company because the cost is much less than the residential carpentry classification. For example, in South Carolina, one carrier’s current rate for executive supervisor is $3.73 per $100 of payroll whereas their rate for residential carpentry is $19.51 per $100 of payroll. The classification rules published by NCCI are a bit strict on when the executive supervisor classification can be used and the auditors often try to force what I consider to be true executive supervisors into the more expensive residential carpentry classification. Under the technical classification rules, an executive supervisor spends his day arranging for delivery of materials, scheduling subs, and briefly visiting each job site no more than once per day to inspect the work of the subs. This is a brief summary and oversimplification of the rule but I think you get the point. If you tell the auditor that your executive supervisor spends a lot of time on the job site and that he personally supervises the work, he’ll be reclassified as residential carpentry and this will cost you a lot of money.