Let’s face it—not many people get excited when they hear the word “audit.” But when it comes to commercial insurance audits, they have their place and reason for existing.
The bottom line is that they simply can’t be ignored and need to be completed in a timely and accurate manner. This helps your carrier match your current business size and structure to the right coverage, saving you a lot of headaches in the long run.
Why do commercial insurance audits exist?
The entire point of audits is to ensure that your business coverage and premiums accurately represent your risks. Annual audits compare your estimated exposures to your actual exposures — things like payroll amounts for Workers’ Comp coverage, and sales and cost of services completed by subcontractors for General Liability insurance. It varies by business type, but in essence, audits ensure your insurance aligns with the reality of your business risks.
What insurance lines are typically audited?
In Iowa, Workers’ Comp insurance is almost always audited, but some states don’t require audits when a company’s premium falls under a certain amount. General Liability and Liquor Liability are two of the other most audited lines. However, large fleet auto, blanketed equipment schedules, builders’ risk and other lines of business where the rating basis fluctuates can also be audited. Carriers should disclose audits when they provide coverage quotes, so you would know to expect them prior to binding coverage.
How and when is an audit performed?
Audits are typically requested within 30-60 days after a policy’s expiration date. How or who performs the audit depends on the size of a business and complexity of exposures. Some audits are mailed/emailed and the business is expected to provide requested information, while other audits are completed by telephone or in-person by a carrier’s employee or a third-party audit company.
What happens if we don’t complete an audit?
Let us just say clearly — don’t ignore an audit request. Your policies include language about audit requirements and not complying can have substantial consequences. For example, in some states, carriers can charge up to twice the estimated payroll on Workers’ Compensation if an audit isn’t completed in a timely manner. If audit requests are continually ignored, a carrier can — and will, if it continues to happen — non-renew. This will make it difficult to find carriers to offer coverage in the future, and your insurance advisor is required to disclose this information upon requesting quotes. Having a record of non-renewal is not a good place to be.
What items should I have on-hand to complete an audit?
Again, this will depend on the size and complexity of your risks, but generally it will include (but is not limited to):
- Description of your company services
- Payroll records broken down by employee and duties. If employees fall under multiple classes of employment categories, you will need specific records to show the breakdown of hours they work in each. Records of overtime pay should also be provided.
- If a sole proprietor company, Form 1040 Schedule C
- Federal and state payroll tax reports (940 and 941)
- W2 forms
- 1099s
- QuickBooks reports
- Job descriptions
- Unemployment reports
- Profit and loss statements
- Subcontractors’ certificates of insurance (if applicable)
Will I be audited if my coverage is written on a reporting form or pay-as-you-go format?
Yes. Generally, there will be an audit at policy expiration, but the reporting form/pay-as-you-go program monitors the exposure throughout the term, so the final adjustment is not typically drastic.
As an owner/corporate officer, should I include my own payroll information?
Each state varies on the requirements for which employees are automatically included or excluded from Workers’ Comp coverage based on the business type.
What if I feel my audit results are incorrect?
Don’t wait — reach out to your insurance advisor immediately. There may be some limitations on dispute timeframes, and if you don’t take steps right away on incorrect information, the carrier may endorse the current policy. Insurance advisors can request audit worksheets from carriers to review details behind exposure totals. If after reviewing the details you feel information is still incorrect, you can gather the appropriate documentations for an audit dispute.
One of the benefits of working with insurance advisors is the software they often have available to cross-reference business class codes. Often, businesses don’t realize that they are classified incorrectly with carriers. Codes can make a big difference in premium amounts, so verifying you have the correct classification could potentially save you money.
What if I have an uninsured subcontractor or I’m unable to secure their certificate of insurance?
It is really important to have updated insurance certificates for all subcontractors throughout the year. If you have an uninsured subcontractor, your insurance carrier will pick up on this additional exposure through the audit. It will also affect future insurability.
Because every state differs on laws and regulations regarding required Workers’ Compensation insurance, you’ll want to make sure you have proper documentation for the state(s) you’re insured in.
Your state website provides many useful resources, but it’s important to check with your insurance advisor about what forms your carrier(s) accept. Your state website can be located at the link below:
Don’t fear the audit; reach out to your insurance advisor if you need help!
