Avoid Surprise Premium Increases by Collecting Subcontractor Insurance Certificates

Author, Jack Marrs, Associate Account Executive, Rancho Mesa Insurance Services, Inc.

In the nonprofit world, every dollar matters. Whether you are running community programs, providing housing, or supporting individuals with disabilities, it is important to keep operating costs predictable and under control.

There is one area where we are seeing many nonprofits get blindsided during workers’ compensation audits and it often leads to unexpected premium increases.

If your organization pays independent contractors or subcontractors like drivers, program instructors, consultants, and maintenance workers and you do not collect certificates of insurance (COI) showing they have active workers’ compensation coverage, your insurance carrier may treat them like your employees during the annual audit.

The consequences of not collecting proof of workers’ compensation coverage means:

• The amounts you paid those individuals will be added to your payroll,

• Your final premium could increase significantly,

• You will be paying more for coverage you did not intend to buy.

We have recently seen multiple nonprofits hit with unexpected audit bills, not because they did anything wrong, but because they were not aware of this requirement.

Examples:

• A nonprofit that hired a part-time yoga instructor for their afterschool program did not request a COI. At audit, the instructor’s pay was included as payroll, adding over $3,000 to the final premium.

• Another organization paid an IT consultant $15,000 for a short-term project. The organization assumed since the consultant was not an employee, they didn’t need to worry about workers’ compensation. At audit, the amount paid to the consultant was included in the payroll calculation and the organization had to pay an extra $2,500 in premium.

Carriers are tightening their audit practices. If you cannot provide proper documentation that a subcontractor had their own workers’ compensation coverage, the carrier assumes your organization will be responsible if they get injured. Even if you never intended to cover them, they will count that payment towards your audited payroll and charge you accordingly.

To prevent an unexpected increase in premium at audit, always collect and keep on file a valid COI for any subcontractor or independent contractor you pay. The COI must show active workers’ compensation coverage for the time they performed work for you. If someone says they are exempt or does not have coverage, demand that they provide some form of documentation showing proof they do not need it. When in doubt, consult with your insurance broker and/or your workers’ compensation auditor to understand the potential issues.

If your organization is paying subcontractors or independent contractors, do not risk a surprise audit bill. Collect and retain COIs that prove they are covered. It is a small administrative step that protects your mission and your budget.

For questions about avoiding surprise workers’ compensation increases at audit, contact me at (619) 486-6569 or jmarrs@ranchomesa.com.