When you buy a commercial insurance policy, often times the premium isn't final. It's more of an estimate that is based on your business' activities from the previous year. Businesses are constantly changing, so these estimates will change too. The purpose of an annual audit is to use actual data and information from your business operations to determine the most accurate premium. If this sounds confusing to you, you’re not alone. It’s a commonly misunderstood part of the insurance process. Let’s take a look at what an audit means, and how you can prepare for it.
Understanding Commercial Insurance Audits
Insurance premium audits are common when it comes to general liability insurance, liquor liability insurance, workers compensation insurance and other commercial insurance policies. The audit is used to establish the premium that should have been paid, based on your business's operations.
When it's all said and done, you could end up with a balance due, which means you underpaid premiums for the year, or you could end up with a credit. A credit means you have overpaid your premiums for the year and the carrier is refunding your over payment.
What Will Carriers Want To Know For an Audit?
Start by familiarizing yourself with common terms in commercial insurance auditing.
For example, a workers compensation audit is basically an insurance company’s evaluation of your business for workers comp purposes. It’s conducted to make sure that your premiums aren’t too high or too low to be appropriate for the risk involved. Remuneration is a payroll equivalent that the system uses to establish the premium.
During an audit, the auditor will look at things like workers comp class codes, which are essentially risk ratings based on employment type. Employees who perform high-risk tasks are coded differently than low-risk employees. Reclassification may take place to assign employees to the right category.
During a commercial liability audit, they usually base their premiums on sales levels. Occasionally they will ask for additional information such as payroll data. With a liquor liability insurance audit you can expect the same thing. Carriers will want to look at gross sales, and sales broken down between alcoholic beverage sales, and non-alcoholic beverages and food sales.
A Typical Audit Scenario
Now that you know the basic terms involved, here’s how audits often plays out in the real world.
Alex is an inventory clerk for a media company. Typically, his job would be considered low-risk for workers comp claims. He mostly sits at a desk. However, during an audit, the insurance auditor realizes that one of Alex’s weekly job duties is to walk into a magazine printing facility and check the inventory, which includes large stacked paper rolls, printing ink, and equipment lubricants. He’s coming into contact with zones that have falling objects and hazardous liquids. The auditor reclassifies Alex into a higher-risk class code.
As Alex’s employer, you might be frustrated by an increase in your premiums after the audit. But from the insurance company’s perspective, Alex could easily be injured by a falling paper roll, chemical, or other workplace hazards.
Being Prepared for Your Audit
The example above shows that one of the best things you can do to get ready for your audit is to be mentally prepared for things to change. Your business evolves every day, and your insurance must evolve with it.
Here’s a list of things to do before the audit takes place:
- Prepare time cards and payroll. If you estimated your payroll when you initially bought insurance, prepare for a surprise. Your insurance company will, by necessity, adjust your premiums based on the actual numbers. The auditor will likely need to see the previous year’s time card information and payroll numbers.
- Gather paperwork and system passwords. The auditor will need to see all kinds of paperwork and information from your systems. Make sure it’s easy to access. It’s time-consuming to stand around waiting while someone finds the right paper or password.
- Assess contractors and subcontractors. Your insurance auditor will need to understand who is employed by your company, who your contractors are, and who other subcontractors may be. Don’t be caught off guard. Be prepared with a full list. If you use subcontractors, get a Certificate of Insurance from them evidencing that Workers Compensation coverage exists, otherwise they will be added to your premium bill.
- Be available to the auditor. It’s going to be a rocky process if your top managers aren’t available to answer the auditor’s questions. They’ll need to know information from your financial officer, human resources director, warehouse supervisor, and anyone else associated with company risks. In many cases, the auditor will need to speak directly to the CEO.
We hope you feel better prepared for a commercial insurance audit using the tips you’ve learned here. If you still have questions, or need help preparing for your audit, Links is here to help. Be sure you are fully covered, click here for your free insurance quote today.