When you purchase a commercial insurance policy, such as: General Liability Insurance or Workers’ Compensation, your premium isn’t necessarily final; it’s actually an estimate. This is because your insurance company assigns a premium based upon your projected exposures for the policy and typically estimates the premium upon your projected Scope of Work, Gross Receipts, W2 Employee Payroll, and 1099 Subcontractor Costs. Business changes, of course, and these estimates can be incorrect. The purpose of the insurance premium audit is to use the actual sales and operations data to determine how accurate your estimates are, and to make sure you’re getting the proper amount of coverage for your business.
What Is The Purpose of a General Liability Insurance Audit?
A General Liability Insurance audit ensures your business has the exact amount of insurance coverage needed. Your business can change a lot from year to year. For example, if your sales increase, or you begin to take on larger jobs, you may have to hire new employees to assist with increased demand. Or, you may have downsized as work slows down during the holidays and winter months, so you had fewer employees at the end of the year. In either case, you may need to adjust your coverage amount based on the changes to your business.
Workers’ Compensation Insurance Audits, What Do They Need?
Because Workers’ Compensation policies are based entirely on payroll data, payroll audits are very common, and if you keep good records, they are fairly simple. The carrier can audit on a yearly, quarterly or monthly basis, and your premium will be adjusted up or down based on the last period’s audit. In many cases, this auditing process has become fully automated.
Best Practices for an Insurance Audit?
- When you apply for coverage, ask exactly what the premium basis is, and/or what the premium is based off of. This way, you know exactly what numbers you need to be concerned about when it comes time for an audit, or even throughout the year if you need to make adjustments to your policy.
- Keep track of time and payroll for different kinds of work, job categories, etc. This allows you to ensure your workers are classified properly throughout the year.
- Obtain License Numbers and Certificates of Insurance from your subcontractors. This will prove that you’re using licensed and insured subcontractors, which will relieve you from having to include them as employees on your General Liability and Workers’ Compensation Policies.
- Ensure a responsible and informed individual is present and available for on-site audits.
- Inform your insurance broker immediately about any large changes to your operations, such as your scope of work, Gross Receipts, W2 Employee Payroll, or 1099 Subcontractor Costs.
- Make sure your figures for the audit are as exact as possible. If you asked up front exactly what your premium basis was, you shouldn’t have to use estimates. If you do, or if the carrier feels they are not quite getting the full story, they will request further information, or they could wind up charging a higher premium to compensate for the underwriting uncertainty.
Benefits of an Insurance Audit
The primary benefit of a General Liability and Workers’ Compensation audit is that it informs the business owner that his company has an adequate amount of insurance coverage. Any deficiencies in coverage can expose the company to expensive lawsuits and high settlement costs. The audit can also produce results that the business owner can use to become a more informed customer. Contractors can assess the level of coverage they need and compare that to the liability policies available from various providers to make the most cost-efficient choice. At the end of the process, you could wind up with a balance due, meaning you underpaid premiums for the year, or you could wind up with a credit. This means you overpaid your premiums for the year and the carrier is either crediting or refunding your overpayment to you.
Be aware that if you don’t complete an insurance audit, your insurer can:
- Charge a premium increase, which, in some cases can be a significant amount.
- Cancel your policy, leaving you without coverage.
- Report you to a collection agency if there’s a balance due on your premium and you don’t pay it.
Choosing the right policy and coverages is important and can help you run a successful business. With more than 15 years of experience, we know that every contractor has unique needs and situations. Just like your projects, we won’t stop until the job is completed, and that includes assisting you with your audit.