Beware

Individuals and companies who claim to provide audit or consulting services aimed at recovering your premiums are not equal. Some are down right scary. Obviously, I’d like every company to work with us; however, since that is not reasonable, I’ll give you some tips and cautions.

If all things are equal, one should select the lowest price when hiring an auditing firm. However, ALL THINGS ARE NOT EQUAL. In fact, consultants and auditing firms typically perform different functions. Also, companies that claim to be auditors may not know the first thing about auditing. Following are a few tips that can help you decide who you should trust to audit your experience modification factor, classifications, claims, or premium in general.

1. If the consultant’s fee is contingent upon performance, be sure it is contingent on the consultant’s performance and not yours, your agent’s, or someone else’s performance. I have seen a contract provision that shocked me. I can’t believe anyone would agree to such terms. The terms say the agreement is “exclusive.” That is, no other entity may be engaged to perform the same work. This is not unreasonable in and of itself. However, the article goes on to say that you or your agent may resolve any dispute you want but you agree to pay the consultant anyway. Wow! Does that mean the consultant doesn’t even have to prove they did the work that resulted in dropping your premium? Does that mean you or your agent can’t correct anything without you owing the consultant – who did nothing? If you see this provision, BEWARE. Be sure to speak with your attorney on this one. There is no way I would ever sign such a provision.
2. Confidentiality and non-disclosure provisions are not always unreasonable. However, I have seen a contract provision that requires the client (you) to obtain permissions before any information is disseminated to a third party. This may not be unreasonable if it pertained to the consultant’s trade secrets or proprietary information, but this article didn’t. Instead, it includes all information obtained from anyone having to do with any aspect of the work or anything anticipated. Does this include your own information? What about loss runs, policies, and premium audits? If you see this provision, BEWARE. Obtain the advice of your attorney before signing.
3. In my opinion, every contract should have a definite term. If not, how do you know when it is finished? I’ve seen many related issues as a result of companies not knowing when the agreement has expired, or if it even has expired.
4. Certain companies say they will perform a premium audit on-site. They ask that you have all data you want audited available for their scheduled visit. BEWARE. I estimate that my company has conducted in excess of 20,000 compliance audits, and I can tell you it is rare indeed to have all data required to perform the audit available day one. Audits follow audit trails. That is, auditors start with basic data and follow audit trails. If companies don’t do this, I wouldn’t trust their audit because they are not performing one. And, if a company is not performing a thorough audit, not all of the errors that could be corrected will be, which means you could be leaving money on the table.Furthermore, when companies want to come to your site to perform the audit, I suspect they are focusing on classifications. This in itself is not bad but – BEWARE. There are horror stories out there and I wouldn’t want you to be a victim of one.Let me explain. If a company comes in and changes a classification resulting in return premium of $50,000 that’s a good deal – right? If you pay a contingency fee of 50%, it was a good deal – right? NOT NECESSARILY. The classifications used should be what are required by state-specific classification placement rules. If not, the insurance company has every right to change them back.If rule allows for an employee or a group of employees to be classified under one of two different classification codes, here is the bottom line. Moving payroll to classifications with a lower rate may result in lower premiums in the current year. What you may not be told (or what the consultant may not know) is that such action may place upward pressure on future modification factors and could result in higher future premiums.Let’s go back to our example. In our example, your consultant moves payroll from one classification to a different classification having a lower rate. The change results in a $50,000 reduction in premium. You gladly pay the 50% contingency fee and never realize the change increased three future experience modification factors. Let’s say the increase in the modification factors resulted in an increase in premium of $25,000 per year or a total of $75,000. Therefore the net effect of the change was a loss of $25,000 prior to paying the consultant’s fee. After paying the consultant, you lost $50,000 – not a good deal – BEWARE.Any consultant or auditor worthy of the title can provide you with the net result of the change in classification code. That is, they should be able to tell you how much your premium will be reduced in the current year, as well as provide you with an estimate of how much your premium will increase in future years. If they can’t, BEWARE. Be sure any contingent fee for classification changes is determined by taking into consideration the total impact of the change not just the current year.
5. Are you hiring a consultant or a compliance auditor? They are different. Consultants many times are looking only for specific issues and are not performing a thorough compliance audit. That is why we go behind anyone and typically find overpayments. One common tactic of a consultant is to check for specific classifications. For example, there is a difference in “precision” machining versus machining. The consultant may target your company because you are a machine shop and s/he is aware of the difference in rates. The consultant comes in, makes the change, and is finished. There was no in-depth audit. This is not necessarily bad as long as that is what you expect the consultant to do. But, please don’t compare this situation – regardless of if it is called an audit or not – to our in-depth compliance audit. Also, if this is the case, be sure to read item 4 above.
6. If the company you are hiring negotiates claim reserves – BEWARE. Many states require such companies to be licensed. If you operate in one of these states, be sure your consultant is appropriately licensed.
7. Which is a better situation – a company that charges 50% or a company that charges a 30% contingent fee? IT DEPENDS but BEWARE of low contingency fees. You do get what you pay for. Some companies that charge a smaller contingency fee do so because they “cherry-pick” the issues that will result in the largest recovery – without performing a thorough audit that identifies (and corrects) all issues. Furthermore, there is another issue that may arise if you agree to a lower contingency fee. If you agree to a contingent fee of 50% of premium reductions in the current and historical years, your consultant or auditor provides proof of their work, and your consultant or auditor lays no claim to future premium reduction resulting from their work, you know exactly what you are paying for. Every reduction in premium can be proven. However, if a company charges 30% but lays claim to impact on future premiums, you could end up paying more than you would have if the fee was only calculated on existing premium. This leads to serious issues because it can be very difficult to determine the impact of a change on future premiums. If you are paying on estimated impact, BEWARE. If you agree to pay a contingent fee based on future impact, or if the agreement is not clear on this issue, be sure you understand the mechanism for determining how you will pay for the impact on future premiums. Please call us if you need help.
8. Companies or individuals may claim to be auditors and not be. That is a matter of definition. If a company has specific audit procedures or checklists, has a quality control review for every audit, and documents their work, they may be an auditing firm. If not – BEWARE.
9. We’ve received many complaints concerning consultants’ lack of communication. After signing the agreement, some companies seem to disappear. You should expect scheduled communication to provide audit updates, as well as communication when a finding is identified, and updates throughout the audit process. If your consultant is not willing to add a communication requirement to your agreement – BEWARE.
10. An auditing firm should be able to provide you with very specific results for companies having profiles like yours. After all, auditing firms are numbers people. If the company or individual claiming to be an auditing firm can’t supply you with detailed historic audit results such as; probability of recovery, average recovery, largest recovery, and number of audits or policies performed for companies having profiles similar to yours – BEWARE. They probably just think they are an auditing firm.
11. If you are introduced to an individual or company by your agent, be sure to determine what the relationship is between your agent and the company (individual, consultant, or company). If money exchanges hands between the two of them – BEWARE. You should expect the consultant or agent to act in your best interest. If they are too close to your agent, undue influence can be exerted. For example, we have been asked by referring agents to “walk away” from a finding without telling our client. If we are asked, I’m sure the same happens to others. We do not “walk away” without advising our client of the situation. The decision to “walk away” from a finding belongs with you – the client – and not with the agent. After all, the agent may lose commissions on the recovered premium. Remember, the agent is the sales “agent” of the insurance carrier and there may be a conflict of interest. Unless you are sure the consultant is acting in your best interest – without conflict of interest – BEWARE.
12. How does your agent or consultant find business? Does it use its own market research and sales force? Or, does it pay commission to anyone who will bring business? If the latter is true – BEWARE.
13. Are you hiring a company or an individual? It is easy today to have the appearances of a company but actually be operating with one or two people out of a spare bedroom. That is not to say that individuals can’t be effective if operating by themselves or with another person or two. After all, some very successful companies, including ours, started out in spare bedrooms. However, BEWARE of the risk. Will they be there tomorrow? Do they have the resources to serve you adequately?