Commercial Insurance Audits
Why, How, and Best Practices
Most businesses that carry general liability and workers compensation insurance undergo an annual audit from their insurance company. The audit is how an insurance company determines how much risk they actually insured over the past year. The insurance company makes a commitment to the policyholder to cover the risks of the business during the policy term even though they cannot determine the exact level of risk. In exchange, the policyholder agrees that the insurance company can verify (audit) the business’s actual risk, such as payroll or sales figures once the policy has expired.
How does an audit affect your insurance cost
The insurance company charges you an annual premium usually based on your estimated payroll or sales for the year, and when the policy term is complete, they will audit your actual payroll or sales for that year.
In most cases, once an audit is completed you will either owe additional premium to the insurance company, or the insurance company will owe you a premium refund.
An annual audit will help make sure that you are not overpaying or underpaying for your insurance. In addition, an audit can help uncover risks that you did not know you had.
How do insurance companies complete the audits
An insurance company will conduct an audit in several different ways. The three typical ways include:
1. Physical audit – a representative from your insurance company will set an appointment with you or your accountant and meet at a location of your choosing.
2. Phone audit – a representative from your insurance company will set a time to talk with you over the phone and obtain the information. Some phone audits will also require emailing of documents to the auditor
3. Mail audits – or “self-audits,” the insurance company will mail you a packet with questions and list of documents needed. You will complete the packet and send it back to them. Some companies now also have online audit forms.
Preparing for your audit
Audits are typically a simple process of verifying your sales and payroll figures. To prepare for your audit you should have the following:
· Policy dates that are being audited
· Payroll and sales summary for the policy period
· Supporting documents such as sales journals, tax reports, W2s, 1099 forms
· Certificates of insurance for subcontractors
· Be prepared to provide a description of each employees job duties
· List of company owners/officers
Once the audit is completed
Once your audit is completed you will receive a final audit report from the insurance company. You should review the results of your audit carefully with your agent to determine accuracy. Sometimes revisions are needed to correct a classification of payroll or mistake.
Most companies will automatically update your current policy term to reflect the results of your last audit. This is a discussion you need to have with you agent and based on your projections of the business you should determine payroll and sales estimates moving forward.
Best practices for an audit
· Keep good records of payroll for different kinds of work, job categories, etc.
· Make sure you always collect certificates of insurance from subcontractors prior to them performing work for you
· Have information ready for the auditor to review prior to your appointment
· Discuss audit results with your agent
· Notify your agent of unexpected large increases or decreases in your payroll or sales throughout the year
· Notify your agent of changes to your operations throughout the year
If you have any questions about insurance audits or how we can help you handle your audits easier, please give us a call at (219)769-4840. Briggs Insurance Agency has been providing commercial insurance to clients in Indiana and Illinois for over 70 years and we can help you too.