A California appeals court ruled that an employer's silence can amount to blocking a payroll audit - enough to cancel a workers' comp policy.
In a decision certified for publication on August 6, 2026, the Third Appellate District annulled a Workers' Compensation Appeals Board order and sided with Employers Preferred Insurance Company against Purchase Green Artificial Grass, the company it had covered.
The dispute started with a routine audit. When the 2020 policy expired on May 5, 2021, the insurer needed payroll data to set the final premium. It sent letters and emails on May 5, May 27 and June 7, then a certified letter on August 5, 2021, delivered August 10. The company never answered.
So on August 5, 2021, the insurer moved to cancel the 2021 policy, effective September 14, 2021.
The stakes surfaced months later. On February 3, 2022, an employee was injured and filed a workers' comp claim. The insurer denied it, pointing to the September cancellation. In arbitration, the appeals board sided with the employer, finding that neither the policy nor the Insurance Code spelled out what "failure to permit" an audit meant.
The court disagreed and annulled the board's order.
Its reasoning turned on two policy terms. The records provision said the insured would keep records needed to compute premium and provide copies when asked. An audit endorsement required the insured to "provide us, or our authorized representative, access to records necessary to perform a payroll verification audit."
Read together, the court said, those terms gave the employer an "affirmative obligation" to hand over records. A missing definition was not fatal. What counted was reasonableness, and ignoring three rounds of requests plus a certified letter was, on any reasonable reading, a failure to permit the audit.
The numbers backed it up. The certified letter went out 92 days after the 2020 policy expired, and cancellation took effect 35 days after the employer received it. The employer gave no "compelling business reason" for the silence. Its owner simply did not remember getting the communications.
The court also rejected an equitable estoppel argument built on a February 8, 2022 letter listing the wrong policy end date. That letter came after the injury, so the employer could not have relied on it for coverage.
By September 14, 2021, the court concluded, all reasonable deadlines had passed and the policy "unambiguously permitted" cancellation. It annulled the board's order and sent the case back for further proceedings.
