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Q. Is it true that a new law permits workers' compensation insurers to impose a treble-premium penalty on employers who fail to cooperate with payroll audits?

A. Yes. Effective Jan. 1, 2008, new California Insurance Code Section 11760.1 will permit workers' compensation insurers to charge employer/policyholders "a total premium for the policy equal to three times the insurer's then-current estimate of the annual premium on the expiration date of the policy," if the employer fails to permit the insurer to conduct a payroll audit of its employees, uninsured subcontractors and employees of any of its uninsured subcontractors during the policy period. The law also permits insurers to be reimbursed for costs in attempting to perform the audit.

Insurers would be permitted to impose the treble-premium charge only if the employer failed to provide "access" to its records to permit the payroll audit to be completed; "access" is defined in Section 11760.1(b) to mean, "any time during regular business hours during the policy period and within three years after the policy period ends," or as otherwise mutually agreed.

The new law will also require insurers to make at least three attempts to perform the audit within a 90-day period, and notify the employer by certified mail of the amount of the treble premium and its attempted audit costs that will be due unless access is provided within 30 days of the date of the certified mailing, or unless the employer has provided a "compelling business reason" for its failure.

A copy of the new law appears below:

TEXT OF CALIFORNIA ASSEMBLY BILL 812, WHICH TAKES EFFECT 1/1/08:

THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:

SECTION 1. Section 11760.1 is added to the Insurance Code, to read:
11760.1. (a) If an employer fails to provide for access by the insurer or its authorized representative to its records, to enable the insurer to perform an audit to determine the remuneration earned by the employer's employees and by any of its uninsured subcontractors and the employees of any of its uninsured subcontractors during the policy period, the employer shall be liable to pay to the insurer a total premium for the policy equal to three times the insurer's then-current estimate of the annual premium on the expiration date of the policy. The employer shall also be liable, in addition to the premium, for costs incurred by the insurer in its attempts to perform an audit, after the insured has failed upon the insurer's third request during at least a 90-day period to provide access, and the insured has provided no compelling business reason for the failure. This section shall only apply if the insurer elects to comply with the conditions set forth in subdivision (d).
(b) "Access" shall mean access at any time during regular business hours during the policy period and within three years after the policy period ends. "Access" may also include any other time mutually agreed upon by the employer and insurer.
(c) The insurer shall have and follow regular and reasonable rules and procedures to notify employers of their duty to provide for access to records, and to contact employers to make appointments during regular business hours for that purpose.
(d) Upon the employer's failure to provide access after the insurer's third request during at least a 90-day period, the insurer may notify the employer through its mailing of a certified, return-receipt, document of the increased premium and the total amount of the costs incurred by the insurer for its attempts to perform an audit as described under subdivision (a). Upon the expiration of 30 days after the delivery of the notice, collection by the insurer of the amount of premium and costs described under subdivision (a), less all premiums previously paid by the employer for the policy, shall be fully enforceable and executable.
(e) If the employer provides for access to its records after having received the notice described in subdivision (d), and if the insurer then succeeds in performing the audit to its satisfaction, the insurer shall revise the total premium and costs payable for the policy by the employer to reflect the results of its audit.