Insurance Audit, why?
An insurance audit is an insurance company’s way of determining how much risk they actually insured over the past year. Your business could have undergone a drastic change over the past year since your policy went into effect. Several factors determine the premium carriers charge for General Liability and Worker’s Compensation insurance. The two factors which are certain projections are your sales and payroll.
Sales: Most General Liability quotes are based on your estimated or projected sales/revenue for the upcoming 12-month period as the primary “rating factor.” It’s important to review the “exposure” section of the quote with us to ensure estimates are on par with your expected business operations so any changes to the business should be reported; many companies only cover for what classification codes are used on the policy. For example, if you are rated for painting, then start siding operations, a new code needs to be added in order to be covered.
Payroll: Worker’s Compensation quotes are priced using your estimated gross payroll number for the upcoming 12-month period. This includes anyone that you pay on a 1099 that does not have their own insurance. It is important to disclose all of your business operations to ensure the classifications and payroll amounts have been identified appropriately so there are no surprises should an audit be required. If an audit reveals that sales/revenue are higher than originally projected, then an audit premium bill will be issued for the additional premium owed.
Sub-Contractors: ALL sub-contractors that you hire should provide you with a certificate of insurance. Upon audit, if you do not have a certificate from all of your subs, you will be responsible for insuring them under your policy. Make sure you obtain certificates from all subs and keep them in a separate file to be inspected at audit. You or your company should be listed as the “Certificate Holder”. If they do not have their own insurance, keep copies of the contract/invoices showing the breakdown between labor and materials. It is recommended and sometimes required that a subcontractor carries at least the limits you have. You should be included as an “Additional Insured” on their policy and have a “Hold Harmless” agreement in place.
Is a Premium Audit Optional?
No, it is not optional. State regulations require carriers to conduct periodic premium audits of all workers’ compensation policies. This is an industry standard practice for all insurance companies that provide business insurance coverage.
What Should I Expect?
At the end of your policy period, you will be contacted by the audit department of the carrier letting you know it is time to complete your audit. It is important that you comply with the terms of the audit or be subject to the carrier’s assumptions about your sale/revenue. If an audit premium is not paid, negative action may be taken against you and/or your business which could include sending the audit premium due to a collections company. A company can also cancel your policy for “Material Misrepresentation” if you do not comply with the audit.
Will my Premium Change?
After the audit is conducted, your premium may be adjusted based on your business activity during the prior policy period. Please note that audit premiums are due immediately and CANNOT be financed. In some cases, the current term policy would also be endorsed to reflect the audited payrolls and changes to any classifications.