How to Stay on the “Good Side” of the Audit Unit

How to Stay on the “Good Side” of the Audit UnitThe Department of Industrial Relations’ Office of Self-Insurance Plans has recently outlined its best practices for claim handling and, in particular, its red flags for audit risks.  The Office of Self-Insurance Plans noted that there are a growing number of self-insured employers in California, and new e-filing and updated Regulations will also result in increased audits and increased oversight.

What Type of Audits Does the Audit Unit Perform?

The Audit Unit performs several types of audits of self-insured employers. “Revocation” audits are performed when the chief of the Self-Insurance Unit revokes a self-insured plan. Under a revocation audit, potentially all claims must be audited and the employer must bear the cost of the audit. A special audit is allowed upon any showing of good cause. This would likely mean special audits are available when employers have a highly unrepresentative number or rate of complaints.

Of the most concern, however, are the routine and normal audits performed. The Office of Self-Insurance Plans noted, in particular, that they wanted to focus on the proper closure of claims and the proper denial of claims.

The Office of Self-Insurance Plans is now going to focus on special audits for employers with above-average rates of claim denial. An above-average rate of denials by itself is not a problem, but it will trigger an increased likelihood of an audit. If an employer has above-average rates of denial, for whatever reason, it is even more important that the Audit Unit’s standards for proper closure of claims and proper denial of claims are followed.

What is the Audit Unit Looking For?

The Audit Unit is interested in determining when claims have been properly and timely closed. First and foremost, it requires that all benefits due to the applicant have been provided and paid.  This includes indemnity benefits and medical benefits, as well as Supplemental Job Displacement Benefit Voucher forms, when applicable.

Claims cannot be considered properly closed until applicants have been advised of all remedies and given time to seek those remedies. Denied claims must not be closed prior to issuance of appropriate notices including notices regarding the applicant’s right to a Qualified Medical Evaluation and “Reynolds” notices.

The Audit Unit is interested in insuring that no open and active liens remain on closed files. Therefore, it considers closure of a file without a lien being paid, dismissed, settled, or fully satisfied to be premature.

When an Application for Adjudication of Claim is filed and a denied claim becomes litigated, it is imperative that a final judgment on any such claims is reached. This would include a Findings and Award, a Dismissal Due to Lack of Prosecution, a Stipulated Award, or a Compromise and Release. It is not appropriate to close a claim simply because of inactivity.

When Can a Claim Be Denied?

The Audit Unit also laid out what it believes are proper grounds for a denial of claim. The guidelines it laid out are consistent with decades of Workers’ Compensation Appeals Board practice.

The most important factor to be considered is that the Audit Unit requires a factual, medical, or legal basis for a denial.

Examples of proper factual bases for denial of claims include applicants were discovered not be present at the time or place of injury, injuries that were not witnessed, or other witnesses provide alternative explanations.

Proper legal bases for denials include a determination that an applicant is not a proper employee of the employer or that the claim is barred by an affirmative defense. The most common legal basis for a denial is that the injury did not occur arising out of the employment (AOE) or did not occur within the course and scope of the employment (COE). It is important to note that a final determination must still occur when a claim is denied on a legal basis.

The most potentially troubling area for proper or improper denials of claim is when a claim is denied on medical basis. The Audit Unit and the Workers’ Compensation Appeals Board did not express an opinion as to whether a denial given because of an upcoming 90-day denial deadline is appropriate. However, it is inappropriate to close a file after a denial when the sole reason for the denial was the lack of medical evidence obtained within 90 days. If files are closed based on the lack of medical evidence and medical evidence is not later obtained, and no efforts at obtaining medical evidence are made, this will be a significant red flag for the Audit Unit.

Regardless of the reason for the denial, it must be adequately documented in the file and all proper notices must be sent to the applicant.


The Workers’ Compensation Appeals Board, the Office of Self-Insurance, and the Audit Unit have all emphasized concerns in claims handling. The most important point to remember is that claims should not be closed until all legally-required benefits are provided and paid, all notices sent, and all liens paid, dismissed, or settled. On claims where Applications for Adjudication of Claim have been filed, i.e. litigated claims, a final judgment must have been rendered.

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