I was working with a client that came to me after a worker’s comp audit.  The owner and family were the only ones listed on the policy and drawing salary.  The audit determined that their independent contractors were in fact employees and not independent contractors as they had been reported on 1099-M’s.

The insurance company, who had never audited them before or had a claim, sent the business an invoice for the previous three years  demanding $50,000 in past premiums due, based upon their audit decision.

The business was making a modest profit if that, and the owners were not taking grandiose salaries, I believe the family combined made $50,000 and all three actively worked in the business.  So paying $50,000 premium was not feasible.

So they hired an attorney to help them defend themselves.  The insurance company refused to budge, but finally took a settlement after learning that the company was going to be closing.

The settlement killed business and the owner and family have been blackballed by the insurance company database so all three will never be able to secure workers comp insurance again.  For any future business or the one that died.

Had the insurance company been doing annual audits this would not have been an issue.  I am still uncertain why they had not done them.  If a client refused to do an audit, I know that some companies drop the policy or ratchet up the fees to compensate, this does not seem to have been done.  I believe that there were errors made by both parties.

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