Backdating Workers Comp Insurance

One of the biggest administrative nightmares for insurance companies is dealing with coverage lapses. This is even more challenging when dealing with requests to backdate workers' compensation insurance. Let’s look at how insurance retailers can handle requests to backdate workers' compensation insurance in cases of coverage lapses and all the relevant processes and considerations to address.

Why Do Employers Make Backdated Claims?

A good example of backdated claims is the well-documented incident occurring between J.A.M. Construction and Normandy Insurance. When a J.A.M. worker’s foot was injured, the company spoke to their insurance broker to get workers’ compensation that same day. The broker was able to secure the policy through Normandy Insurance, which then covered the injury. However, the insurance broker failed to let Normandy Insurance know about the injury.

Not surprisingly, Normandy sought contributions from the general contractor’s insurer, Amerisure Insurance Company. The Judge of Compensation Claims ruled in favor of Amerisure, stating that Normandy was responsible for covering the injury. However, Normandy appealed the decision on the grounds that they should not be liable for known, undisclosed losses. The appellate court agreed and reversed the decision, stating that insurance is meant to cover uncertainties, not certain losses.

Understanding Lapses in Coverage

Delays in payments and servicing policies cause an insurance policy to lapse. When this happens, all benefits to the policyholder cease, and the policy is terminated due to premium nonpayment. However, nonpayment only applies when policyholders miss the due date and go beyond the 10-day notice of cancellation period that insurers must provide policyholders. In the case of workers’ compensation insurance, the policy has lapsed when the company continues to operate without an active policy in a state that requires coverage.

Common reasons for workers’ compensation coverage lapses include:

• Nonpayment
• Not accepting a renewal policy in time
• Failing to bind an alternate market option in time following non-renewal situations with an incumbent carrier
• Not securing WC coverage prior to hiring employees

Challenges for Carriers

It boils down to one simple fact: Insurers can’t and should not be expected to cover known losses. When this happens, the entire system is undermined. This puts both the insurance company and other policyholders at risk, as it makes it difficult for insurance companies to remain solvent if this rule were to fall by the wayside. Insurance is based on the idea of something that might occur and wagering against the occurrence happening. Although risks are involved, the process of backdating means any policyholder can expect compensation for something that has already happened, which is no longer a risk but instead a certainty.

Also, most carriers won’t work with businesses with a current lapse, as it could set a precedent that they won’t make timely payments on their new policy. While a 30- to 45-day lapse is not as risky, there are still concerns regarding any claims made during that period and what controls the company has in place to cover their employees’ injuries.

Replacing Lapsed Coverage

When workers’ compensation coverage lapses, it’s important for the policyholder to act as soon as possible. It’s up to the insurance carrier if they are willing to reinstate coverage retroactively dating back to the expiration date, or not. Some of the factors to consider would include:

• The client’s history with the insurance carrier
• How well they’ve met their obligation to pay their premiums since they’ve had the policy
• The number of claims
• Has a claim occurred during the lapse
• Other types of insurance they might have with you

These facts all contribute to risks, and the carrier can decide whether it is worth reinstating the policy retroactively for a longstanding client with a good record or taking steps to show that a client who is consistently missing their payments is unacceptable. You can also insist that they schedule electronic transfer payments to reduce the risk of future lapses.

If the client is new and their coverage has lapsed, you are at greater risk than when dealing with coverage replacement with an in-force policy. In this case, it’s common to ask for a “no loss letter” to confirm the client didn’t have any injuries during the lapse.

Can Lapsed Coverage Be Backdated?

Workers’ compensation comes into effect on the date the policy is issued. Although some clients might request a future effective date for whatever reason, this does not mean the policy can be backdated because the request was made at an earlier date. Backdating workers’ compensation is usually not allowed. In fact, our example above shows just how important it is to have a policy in place before an injury, as well as requesting a no-loss letter from clients with policy lapses. One last consideration is the grace period. If the policy has lapsed, but the grace period is still in effect, then the “backdated” injury during the lapse is acceptable.

Handling Claims During Coverage Lapses

Workers’ compensation covers injuries at work. State laws requiring WC intend the coverage to be in place when an accident occurs. When an employer allows a workers’ compensation policy to lapse, the employer is vulnerable to serious financial implications if they can’t cover the medical expenses. This puts companies with lapsed coverage at risk for lawsuits, as well as state penalties.

In the case of lapsed coverage, it is likely the claim will be rejected because workers’ compensation policies must be in force at the time of the accident. However, if you allow the lapse to be covered with updated payments and reinstate the policy retroactively, this could mean you can approve the claim if the lapsed period did have injuries. And again, the grace period must also be considered in these cases.

Avoiding Coverage Lapses

You can help your clients avoid coverage lapses by offering direct draft or ACH options. This allows the client to install recurring payments to keep their payments on track. If a payment is missed,  the carrier will send a Notice of Cancellation to the client and their agent so they are both aware of what is happening and have time to make their payment before cancellation. You can also keep up to date with renewal notices so your clients can make decisions about their coverage needs.

When it comes to workers’ compensation, it is critical to navigate coverage lapses effectively. Understanding the implications of claims on lapsed policies and determining whether you will allow a lapsed policy to be reinstated retroactively should be decided based on the client’s history with your company.

This article is not intended to be exhaustive, nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.