Relates to ensuring proper payroll auditing of policies for workers' compensation insurance

Summary of Provisions:

Section 1 of the bill would amend subdivision 5 of § 54 of the Workers' Compensation Law ("WCL") to permit NYSIF to cancel a workers' compensation policy on 30 days' notice for the policyholder's failure to cooperate with a payroll audit. Failure to cooperate with a payroll audit is defined to mean the policyholder's failure to: (1) keep an appointment, after at least two attempts, with a payroll auditor during such policyholder's regular business hours upon being provided advance written notice of such appointments; or (2) furnish relevant business records in the course of a payroll audit as required under WCL §§ 95 and 131. NYSIF would also be required to provide an additional warning notice at least 15 days in advance of sending a cancellation notice.

Section 2 of the bill would amend § 93 of the WCL to authorize NYSIF to refuse to issue a policy to an entity or successor entity that owes a balance of unpaid premium on a policy cancelled for failure to cooperate with a payroll audit.

Section 3 of the bill would amend § 95 of the WCL to specify that NYSIF policyholders are required to provide NYSIF premium auditors with records containing information relevant to any policy period including any ledgers, journals, registers, vouchers, contracts, tax reports, payroll and distribution records, and computer programs for retrieving data and also records pertaining to a subcontractor.

Section 4 of the bill would amend subdivision 1 of § 131 of the WCL to specify that all employers are required to provide their workers' compensation insurers with records containing information relevant to any policy period including any ledgers, journals, registers, vouchers, contracts, tax reports, payroll and distribution records, and computer programs for retrieving data and also records pertaining to a subcontractor.

Section 5 of the bill would provide for an effective date of 90 days after enactment and would apply to policies issued or renewed after that date.

Prior Legislative History: This is a new bill.

Statement in Support: This legislation would allow NYSIF to better set appropriate premiums on the workers' compensation insurance policies it writes by having authority to cancel a policy for the policyholder's failure to cooperate with a payroll audit.

Workers' compensation premiums are based on a rate applicable to the classification of work performed by an employer's employees multiplied by the payroll applicable to those employees. All workers' compensation insurers have the right under the WCL to audit their policyholders' records to verify that the amount of payroll and number of employees reported by the policyholder at the beginning of the policy period are accurate and that the nature of the policyholder's business is consistent with the classification of its employees for rating purposes. Without this tool, an insurer cannot assess the extent of the risk posed by the policyholder's business and determine appropriate premiums.

Premium audits are particularly crucial for NYSIF because of its unique place in the workers' compensation insurance market. NYSIF is the insurer of last resort for workers' compensation. NYSIF must insure any employer that applies for workers' compensation insurance, regardless of the risks posed by that employer's operations. In contrast, private insurers are entitled to select their risks and may refuse to insure any employer they believe may not provide accurate payroll information.

Current law allows NYSIF to cancel a policy for workers' compensation only for nonpayment of premium. Private workers' compensation insurers, however, may cancel a policy on any ground merely by providing the policyholder with 30 days' advance notice. If a private insurer has difficulty obtaining an audit, it may either cancel the policy or refuse to renew the policy at the next policy anniversary. Unlike private insurers, NYSIF must continue to provide coverage unless the policyholder defaults on its premium payments even if NYSIF is unable to gain access to the policyholder's books and records.

Having authority to cancel a policyholder for its failure to cooperate with an audit will allow NYSIF to get better cooperation from policyholders in obtaining audits. In the vast majority of these cases, actual cancellation will be unnecessary.

In addition, the relatively small number of polices which NYSIF would actually cancel for the policyholder's failure to cooperate with a payroll audit would be, in most instances, policies that NYSIF now cancels for non-payment of premium with a large balance of premium due. In these cases, the authority to cancel a policy for failure to cooperate with an audit would allow NYSIF to cancel these policies sooner with a lower balance of unpaid premium.

Some NYSIF policyholders intentionally understate their payroll when they apply for a policy with NYSIF and delay payroll audits for an indefinite period of time in order to avoid being charged premium on their full payroll that an audit would reveal. In most cases, these policies are ultimately cancelled for non-payment of premium without an audit being performed. This results in the policyholder receiving months of coverage based on an artificially low premium. Attempts at collection of premiums after cancellation for non-payment are often fruitless because the employer is out of business or in bankruptcy. The cost of these uncollectible premiums is ultimately borne by the vast majority of NYSIF policyholders in the form of lower premium discounts and dividends.

If NYSIF had the ability to cancel these policies for failure to cooperate with an audit, it could cancel these policies earlier and avoid prolonging coverage based on inadequate premiums.

Even after cancellation takes effect, policyholders who allow NYSIF to conduct an audit on their cancelled policy would be eligible to obtain a new policy with NYSIF. NYSIF would have discretion to reinstate the cancelled policy erasing any gap in coverage for any employer that NYSIF concludes is acting in good faith to pay NYSIF what it is owed.

Fiscal Implications: None.

Effective Date: This would take effect ninety days after it becomes law and apply to policies issued or renewed after such effective date.