Insurance Code § 676.8 establishes the conditions under which an insurer may cancel a workers' compensation insurance policy. Among those conditions, IC 676.8(b)(2) permits cancellation based on a failure "to permit the insurer to audit payroll as required by the terms of the policy or of a previous policy issued by the insurer, or to pay any additional premium as a result of an audit of payroll as required by the terms of the policy or of a previous policy." When cancellation is based on that ground, IC 676.8(c) requires at least 10 days' advance written notice. A companion statute, IC 11760.1, permits collection of a premium penalty when an employer fails to provide access to payroll records after the insurer's third request during a period of at least 90 days.
The statutes, however, do not define what constitutes a "failure to permit." In Employers Preferred Insurance Co. v. WCAB (2026) 122 Cal. App. 5th 467, the 3rd District Court of Appeal addressed that question directly, holding that an insurer's cancellation of a workers' compensation policy was valid when the employer made no response whatsoever to multiple audit requests over a period of more than three months, including a certified letter and an advance cancellation notice.
Employers Preferred Insurance Co. (insurance company) provided workers' compensation insurance to Purchase Green Artificial Grass (employer). The policy in effect listed a premium described as an estimate, with the final premium to be determined after the policy period ended using actual payroll data. The policy contained a records provision requiring the employer, on request, to maintain and produce records of information needed to compute premiums, a general audit provision permitting the insurer to examine and audit records during the policy period and a main audit provision that defined a detailed procedure for payroll verification audits, including notice requirements, penalty provisions and time periods. The policy also included cancellation terms stating that the insurance company “may cancel this policy for one or more of the following reasons,” including a “[f]ailure to permit [insurance company] to audit payroll as required by the terms of this policy or a previous policy issued.” If the company cancels the policy for that reason, it “will give [insured] 10 days advance written notice, stating when the cancellation is to take effect.”
When the previous policy expired, the insurance company sent multiple communications requesting payroll records to permit calculation of the final premium — letters and emails May 5, May 27 and June 7, 2021, and a certified letter and email Aug. 5, 2021, which was received by the employer Aug. 10, 2021. The insurance company also sent a notice of cancellation Aug. 5, 2021, stating that the 2021 policy would be canceled effective Sept. 14, 2021, due to the employer's failure to cooperate with the final audit. The employer's owner later testified that he did not remember receiving the letters, emails or cancellation notice.
On Feb. 3, 2022, an employee sustained an injury and filed a workers' compensation claim. On Feb. 18, 2022, the employer paid the outstanding premiums for both the 2020 and 2021 policies. The insurer denied the claim in May 2022, asserting that the 2021 policy had been canceled effective Sept. 14, 2021. On Feb. 8, 2022, a letter from the insurance company stated that the audit was noncompliant, but also stated that the policy period was through May 5, 2022.
The matter was submitted to arbitration, and the arbitrator found the cancellation invalid, reasoning that neither the policy's main audit provision nor IC 676.8 precisely defined what conduct constituted a "failure to permit" an audit. The arbitrator believed that cancellation required "something more than no response to the three final notices and the passage of a 90 day period would give the carrier the right to cancel the policy." The appeals board adopted the arbitrator's decision and denied the insurer's petition for reconsideration. The insurer petitioned the Court of Appeal for writ of review.
The Court of Appeal annulled the appeals board's order and remanded for further proceedings, holding that the employer's failure to respond to the insurer's multiple audit requests constituted a failure to permit the audit under the policy, rendering the cancellation valid.
The court emphasized that insurance contracts are subject to ordinary rules of contract interpretation, and that the primary objective is to give effect to the mutual intent of the parties as expressed in the language of the writing. It also noted that IC 676.8(b)(2) permits the terms of the policy to dictate whether the employer has failed to permit the insurer to audit payroll.
The court agreed with the arbitrator that neither the main audit provision nor the Insurance Code precisely defined the phrase "failure to permit [the insurer] to audit payroll" as used in the policy's cancellation term. It held, however, that the absence of definition was not determinative. It reasoned that not every word or phrase must be precisely defined in an agreement, and courts will not adopt a strained or absurd interpretation to create an ambiguity where none exists. The court found that the arbitrator "missed the forest for the trees," because he focused on finding the precise language of the cancellation term and failed to consider the entirety of the main audit provision against the employer’s complete failure to permit an audit under any reasonable interpretation of the agreement.
Reading the provision in its entirety, the court found that the only reasonable interpretation was that the parties intended the main audit provision to describe the conduct constituting a failure to permit an audit. The provision used the word "fail" repeatedly: "[i]f you fail to provide access within 90 days," "if you fail to provide access after our third request" and "unless you provide a compelling business reason for your failure." It found that the only reasonable interpretation from such language was that the main audit provision was intended by the parties to describe such a failure as justifying cancellation.
The court found that the insurance company followed all requirements in the main audit provision by sending numerous communications over three months, including a certified letter and a notification of cancellation more than a month in the future. But the employer failed to provide the necessary payroll records for insurance company to complete the audit. It concluded that by Sept. 14, 2021, all reasonable deadlines had been surpassed under the policy and that the policy unambiguously permitted the insurance company to cancel the policy due to employer’s unresponsiveness.
The court then rejected three additional arguments raised by the employer. One: It rejected the argument that the insurance company was required to conduct personal outreach — by phone or in-person visit — before concluding that the employer had failed to permit the audit. Nothing in the policy's records or audit provisions required personal outreach, and the mutual intent of the parties, as expressed in writing, did not impose such a duty. Two: It rejected the argument that the employer had not "refused" to cooperate and that the owner's nonresponse was not intentional or willful. The court found that the policy required affirmative action from the employer to provide records when requested — the intent or motive behind the nonresponse was irrelevant. Three: It rejected an equitable estoppel argument based on the letter of Feb. 8, 2022, incorrectly stating that the policy extended through May 5, 2022. Equitable estoppel requires detrimental reliance on a promise. The employee's injury occurred Feb. 3, 2022, five days before the letter was sent, so the employer could not have relied on the letter to believe it had coverage at the time of the injury.
The decision originally was filed as an unpublished decision July 14, 2026. On Aug. 6, 2026, the status was changed from unpublished to published.
Now a published decision of the 3rd District Court of Appeal, it is therefore binding authority on workers' compensation proceedings. It resolves a practical question that arises in premium audit disputes — whether nonresponse to an insurer's audit requests (as opposed to an express refusal) constitutes a "failure to permit" an audit sufficient to justify cancellation under IC 676.8(b)(2).
Under this decision, an employer who simply does not respond to repeated requests for payroll records, including a certified letter with a formal notice of failure, may be deemed to have failed to permit the audit, which would justify cancellation of the policy. The court's observation that the arbitrator "missed the forest for the trees" by searching for a precise definition of the cancellation trigger, rather than reading the audit provision as a whole, is important for future proceedings. Arbitrators and appeals board panels reviewing similar cancellation disputes should evaluate the entirety of the audit provision's language and structure, not merely whether the phrase at issue appears in a defined-terms section.
For employers and their counsel, the decision underscores that passive nonresponse to audit requests or requests for payroll documents carries serious consequences. The employer's argument that its owner simply did not remember receiving the communications was unavailing. The policy imposed an affirmative obligation, and the intent or awareness behind the failure to comply was irrelevant to whether a failure occurred. Employers who receive audit requests should respond promptly and document that response. If there is a legitimate reason for delay, it should be articulated in writing.
The practical stakes of a valid cancellation are illustrated by the facts of this case itself, in which the employer faced a workers' compensation claim with no coverage at the time of the employee's injury. If such a policy is properly canceled, and an employer becomes illegally uninsured for workers' compensation, the employer could face other consequences. Injured employees may bring a civil action in addition to a workers' compensation claim against the uninsured employer. If it is found that an employer "willfully" failed to secure the payment of compensation, its liability for workers' compensation benefits is increased by 10 percent. An uninsured employer is also subject to misdemeanor prosecution, a stop order prohibiting the use of employee labor and civil penalties.
For further discussion on workers' compensation insurance coverage and policy cancellation, see Sullivan on Comp Section 3.9 Cancellation of Insurance. For further discussion regarding the consequences for uninsured employers, start with Section 3.33 Illegally Uninsured Employer.