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A business owner is often terrified when they’re notified they’re being audited. Not necessarily because you did anything wrong, but because you don’t always know if you did everything right. Not only that, but most people think of an IRS audit and the negative connotations that come with it. But what is a commercial insurance audit? What does it look like for a small business?

What is an insurance audit?

An insurance audit—often referred to as a premium audit—is how an insurance company determines whether or not your business is insured for the correct amount of risk and if your business is classified correctly. For example, an insurance company can audit you to determine you’re paying for the correct premium for yourGeneral Liability Insurance orWorkers’ Compensation. Your premium is calculated based upon estimates of your business’s exposure.

What the Auditing Process Could Look Like

So what does the insurance auditing process tend to look like? What do you need to have available for a premium audit?

The Insurance Audit Process

  1. As stated earlier, your initial report to an insurance agent is how your deposit premium is originally quoted. 
  2. The insurance agent/broker shares what you report on your application to various carriers, and the best premium options are presented to you.
  3. You choose a carrier and your premium is typically locked in for a 12 month policy period.
  4. 30–90 days after your policy period ends, you’ll be sent a “worksheet” where you complete information about the previous year’s revenue.
  5. If your revenue was 20% higher than projected, your premium for the previous year will be adjusted up (or lowered if your projections were higher) and the policy is amended. 
  6. You must pay the difference from the original premium to the amended premium—or fight the results if you disagree with it.

An audit of your insurance policy is commonly conducted remotely based on the numbers you provide. Occasionally, an auditor will request to make an appointment to come to your place of business or accountant's office to go over payroll, revenue, etc. in person.

One-Way or Two-Way Auditable

When you initially choose your policy, be sure to check the paperwork (and have your agent help clarify) whether or not the policy is two-way auditable. If it is two-way auditable, it means a carrier can actually refund the business owner partial premiums if you were charged too much. A one-way auditable policy means your rates stay the same—even if you overpaid.

What an Auditor Looks At

An auditor comes in to verify two primary things: sales and payroll. Both are things that you self-report when you initially obtain insurance. An auditor may also verify job descriptions and the number of employees. These things are scrutinized during the policy year. To ascertain what a business’s premiums are, an accurate overview of the exposure is necessary.

Sales: General liability policies are rated using certain factors, one of which is sales. During the application process, you’re usually asked what your projective revenue could be for the next 12 months. Auditors verify that your revenue truly is what you reported it to be.

Payroll: Worker's compensation is priced based on your employee payroll numbers. A risk modifier is multiplied by payroll/number of employees to calculate your premium. 

Exactly what does an auditor look at when conducting a premium audit?

  • W-2’s
  • 941s
  • 1099s
  • Ledgers
  • COIs
  • Job duties
  • Sales tax reports
  • Cash Summaries
  • Unemployment reports

What if Your Business Hires Contractors/Subcontractors?

If your business hires contractors or subcontractors you need to make sure you have aCertificate of Insurance (or certificates of insurance) for your contractors. If you do not show proof that they have this coverage, they will be included under your policies—which will increase your premium(s) at a significant cost to you. You should require contractors to provide you a COI for general liability insurance, workers' compensation, and sometimes certain bonds in case of insurance audits.

"Pay-As-You-Go" Workers' Compensation Policies

Some insurance companies offer pay-as-you-go workers' comp policies. Every payroll period, you report your payroll directly to the insurance company—and pay exactly what you owe each month based on your reported payroll. This eliminates the need for a premium audit and you know you’re not under-paying. 

Other Things to Be Aware of in an Audit

If your sales increase exponentially or your workforce increases or decreases by a significant amount during the middle of your policy term, consider contacting your broker to adjust your insurance policies. Your policy may be able to be renegotiated during the middle of the year so you aren’t hit with a large payment after your policy is audited. 

What Does an Audit Mean for Me?

So what does an audit mean for you? The bottom line is that you want to, 1) report your projections as accurately as possible when you’re completing an insurance application and, 2) keep detailed payroll and accounting records. If you do these two things, insurance audits don't have to be scary. You may even find that the insurance company owes you money. 

Related Articles:Workers' Compensation,General Liability Insurance,Professional Liability Insurance,Certificate of Insurance

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