Here’s what to do – and what not to do – when audit time comes around.
What is an Insurance Audit?
When you take out a business insurance policy for general liability, workers’ comp, and certain other types of coverage, the premium quoted may not be the final figure. Rather, the insurance company estimates your premium on based on your anticipated payroll, sales, receipts, and/or total costs. Because you cannot predict these figures with certainty, at the end of the year the insurance company will want you to provide your actual numbers for whichever measure(s) they are using.
If the figure you provided was high, you could receive a return premium. If you under-estimated, you may owe additional premium. The purpose of the audit is to ensure you are you are getting the right amount of coverage at the proper cost.
Does every business policy get audited?
No. If your organization is subject to an audit, it will be clearly stated on your policy. Audits are done at the discretion of the insurance carrier, and although they may elect not to, it’s safest to assume you will be audited per the terms of your policy.
What can I expect from an audit?
Your insurance carrier will contact you, most likely by mail, and provide instructions on what documentation they need to see. The audit itself may be conducted in person (a representative from the carrier will come to you) or virtually. Either way, you will need to provide whatever documentation the insurance company asks for.
How can I prepare for the audit?
If you have kept organized records throughout the year, the documents you need should be easy to access. The letter and/or worksheet you receive from your carrier will outline the information they require, depending on if your policy is rated on a sales basis or payroll basis. Some common documentation includes:
- Annual federal tax return
- Income and/or Profit and Loss statement
- Payroll journals
- Number of employees and their duties
- Documentation relating to subcontractors or independent contractors you have hired
My business hires subcontractors. How does that affect my audit?
If you subcontract work, you need to get a Certificate Of Insurance from all of your subcontractors and make sure they carry limits equal to your own. The auditor will ask for these records, and will also want to see payments and type of work done. If you are unable to provide copies of Certificates of Insurance for your subcontractors, they will be included on your audit as if they were your employee for both general liability and workers compensation premium. That’s why it’s extremely important to make sure you have certificates of insurance for all your subcontractors.
What happens if I fail to respond in time?
Ignoring the audit is not in your best interest. Many carriers will then issue an estimated audit, which will most likely increase your initial premium. You will then owe that money until you dispute the audit and provide the correct figures. Not responding, or not paying the audit can jeopardize your current coverage. Nonpayment may also result in your being reported to a collections agency.
Still have more questions about insurance audits? Contact your GSW advisor at 480.990.1900 or request to be contacted through our website.
The following articles were used as references for this piece, and contain more detailed information regarding insurance audits.