Don’t forget workers compensation insurance
Sound due diligence when acquiring a business is naturally vital, yet one of the most important, and potentially most costly, is often forgotten.
Workers compensation is complex and businesses must understand that claims history and premiums are used in the calculation of the purchasing employer’s workers compensation insurance premium.
Failure to thoroughly research prior and current claims and premium history could be catastrophic and the team at Warren Saunders Insurance Brokers have highlighted below a recent example.
NSW case study
A large aged care and retirement living provider is paying over $0,000 in premiums and is deemed a large employer for workers compensation insurance. This employer is looking to acquire another business.
After six months of discussions and negotiations, they purchased a small aged care and retirement living organisation. The purchase not only included the whole operation of the business but also included workers employed by the seller.
The celebrations were short lived, however, following receipt of an extra premium notice of approximately $1.2 million following the final adjustment premium notice issued by the insurer.
Unfortunately throughout the negotiations, including a brief discussion on workers compensation, they were not able to identify the significant premium implications that two claims that had a total cost of $1,000 per claim would have.
As a small employer, the claims had no impact on premiums as their premiums were capped. However, because claims and premium history of the small employer formed part of the acquiring business’ premium, as a much larger employer, the cost of those claims added $400,000 to their adjustment premium, and $800,000 to their renewal premium, a total of over $1.2 million!
Although the acquiring business had a general insurance broker, they did not have the workers compensation expertise to identify many inconsistencies in the claims that ultimately impacted them so heavily. Consequently, Warren Saunders Insurance Brokers were engaged post the acquisition and following an extensive investigation, were able to retrospectively have premiums re-calculated which resulted in $800,000 of the additional premiums being refunded.
This, however, required many months of investigation which, had this taken place prior to the acquisition, would have avoided any additional premium being payable at all. Not all clients would be fortunate enough to benefit in this way as it would largely depend on the circumstances of the individual claims. This is why it is vitally important to engage workers compensation experts during the due diligence phase of any acquisition.
The article was written by the team at Warren Saunders Insurance Brokers (a sponsor of the National Retirement Living Summit 2015). Warren Saunders has over 100 years of combined workers compensation expertise which is unparalleled within the industry. Please be sure to contact them at www.warrensaunders.com.au should you be considering acquiring a business.
Please note that workers compensation insurance is different in each state and can be quite complex due to the different size, structure, classification and circumstances of the organisation.