The Nuts and Bolts of an Insurance Audit
OK, I must confess - I’m an insurance broker, and doing my insurance audits is one of my least favorite tasks. And because I dislike them, I tend to procrastinate. Even though mine are fairly simple. So this message will be to do as I say, not as I do. I'm here to provide a little clarity so you can avoid bumps in the road of your daily business life. OK? Here goes -
So - when are audits required?
Answer - Workers' Compensation policies are always audited shortly after the policy term expires, and General Liability policies are frequently audited, but not always, also at the expiration of the policy term..
What’s important for you as a business owner or manager to know is to be prepared and to avoid procrastination. If an audit is requested, it isn’t a suggestion, it’s a requirement per the terms of the policy contract.
So - what happens if I don’t complete my audit in the required period of time?
Answer - Typically you will receive an audit billing that is estimated, and trust me, it will get your attention. Estimated billings are frequently 150% to 200% of your original Workers' Compensation or General Liability estimate. This is why I say don’t procrastinate. Once you receive this estimated billing you are on the hook for it until the actual audit is processed.
So - what will I need to provide to complete my audit?
Answer - Workers' Compensation is always based on payroll, and the policy is written showing your best guess for the coming year. The audit is meant to settle up you actually did appear to your estimate beginning of the term. To verify, you’ll likely be required to provide -
- Payroll Records – 941- Federal Tax Quarterly Reports;
- California DE-6, Individual Employee earnings
- Certificates of Insurance showing Worker’s' Compensation coverage from any independent contractors or subcontractors.
- A narrative/description your business operation
Overtime is always separated, as Workers' Compensation premium applies only to straight time, not to excess overtime. You’ll also want to separate any owners and/or officers who are excluded from coverage.
Answer - General Liability is sometimes based on payroll, and sometimes based on gross sales, depending on the type of business you have. Again, depending on the type of business you have, you may be asked to provide –
- Your Income Statement/Profit & Loss showing your gross sales
- Payment made to employees
- Payments made to independent and/or sub-contractors for the audited policy term
- Certificates of Insurance from Independent Contractors or Subcontractors, showing proof of General Liabiity for the policy term being audited
Once the auditor has the required documentation, they will settle up with what you originally estimated. If you went over your estimate, you’ll receive a billing; if your audit showed less than your estimate, you’ll receive a refund.
If there is a significant change, up or down – likely your current policy term will also be changed to reflect the audited term.
Important tip - As a broker, we always suggest involving your agent in your audits. There might be times you unknowingly trip yourself up, and we can help minimize these hiccups if you keep us involved.
We at Insurance121 are here to answer your questions, and guide you through the maze of the dreaded audit. Give us a call.