What's the deal with insurance audits?
Certain types of commercial insurance policies---particularly workers comp policies, but also some general liability and other commercial insurance policies---are subject to audits. Yes, it's a bit of a hassle. You may wonder why you have to do it, for the insurance you've already bought.
The reason is that when your policy starts, the premium is based on what will happen in the coming year---how much you will pay in payroll*, what your sales will be, and so forth. Of course, lacking a crystal ball, we don't exactly know what those numbers will be. So we ask you to estimate them, and issue the policy based on that estimatation and expectation.
Then, at the end of the year, the insurance company checks to see what the actual numbers were, and adjusts the policy accordingly. Your premium is based on your actual payroll*, sales, or other basis.
Which is why the insurance company needs to do the audit---to make sure you were charged the correct amount for the business you actually did. Which may be more, or less, than expected.
When Payroll* is More than Just "Payroll"
We casually refer to it as "payroll", but it's really labor costs. All labor costs. This include W-2 employees and 1099 employees, even if you consider them independent contractors.
It also includes any sub-contractors you hire, unless they have separate insurance. Which brings us to Certificates of Insurance....
About those Certificates of Insurance
Certificates from your sub-contractors are used to prove that they have separate insurance, so you don't have to include them in your labor costs---and don't have to pay for insurance for them, yourself.
The important thing is to get those certificates for them, as soon as you can. The auditor is going to want to see them, to exclude those subs from your insurance. So don't wait until you're in the middle of audit (or, worse, after the audit); request those certificates when the sub begins works for you, or as soon afterwards as possible. Have the certificates on hand at the time of the audit; it'll make it much easier.
It's important to complete your audit promptly.
Your audit not only affects your recent policy, but future policies. It enables the insurance companies to make sure those policies are more accurately rated. And any balance due from a prior policy can affect your new policy, or even your ability to get insurance.
Plus, you really want to get the audit out of the way, so you can get back to what you want to do---growing your business.
Audit surprises - a bill and an increase?
When you end up with a much larger payroll* or greater sales than you estimated at the start, you may end up owing extra on the policy that has expired. After all, you had more coverage than you paid for. But your subsequent policy will also need to be increased, to reflect the higher figures likely for the coming year. Though it's wonderful that your business is growing, this can result in an unexpected surprise---paying extra for the old policy and the new policy, at the same time.
How to avoid audit surprises.
If business picks up during the policy year, contact us. Don't wait until the end of the year; adjust your estimates as you go, so your policy better reflects your actual payroll* or sales.
Keep clear, current accounting records, so the audit can be completed easily. Don't forget those Certificates of Insurance.
And complete your audits as quickly as you can, so the actual figures can be applied as promptly as possible.
Still have questions?
Contact us. We're your agent. That's what we're here for.
* - "Payroll": See important note above about what constitutes payroll.
Disclaimer - This page is intended as a general overview of the audit process. Please refer to the insurance policy contract for specifics, or let us know if you have any questions about your particular circumstances.