PREMIUM AUDIT PREPARATION
Audit Resource Guide
Premium audits are typically performed on commercial insurance policies providing workers compensation, general liability, and garage liability coverages. When these policies are issued, you are asked to pay an estimated premium or "advance premium." Advance premiums are based on the nature of your business and your estimate of exposures (i.e. payroll, sales, etc.) for the policy period.
Once your policy expires, the insurance carrier will conduct an audit to determine the actual exposure and calculate the final earned premium. Premium adjustments are then determined by comparing audited exposures and operations with those you originally estimated.
When and How are Audits Typically Done?
An insurance company will collect audit information from you shortly after your policy expires. Smaller, less complex policies may only require that you assemble and send the necessary data via fax or mail. Larger and more complicated policies are handled by a field auditor who will schedule an appointment with you a few weeks after the policy expires.
It is important for the auditor to ask questions about your operations. Most of audits only take 15 - 30 minutes. Audits of larger policies may take longer. Though the auditor will have a number of questions, you won't have to be directly involved during the entire audit if adequate records are available.
What Records Do You Need for an Audit?
Records are important to the audit process. They provide and verify information, save time and minimize your insurance costs. The field auditor will let you know which of the following records will be needed for your audit when the audit appointment is made.
- PAYROLL RECORDS - includes payroll journal and summary, federal tax reports (941s), state unemployment reports and individual earnings records. Totals should be kept for overtime when applicable.
- SALES JOURNAL - includes all goods or products sold, rented and/or distributed as well as service, repair and installation.
- CASH DISBURSEMENTS - shows subcontractors, materials and casual labor.
- CERTIFICATES OF INSURANCE - for subcontractors used during the policy period, showing General Liability insurance in all cases, and Workers Compensation Insurance coverage, if the subcontractor has employees.
How Can You Save Money?
There are several ways you can save on premium dollars depending on the type of business and coverages you have. Not all of the following may apply to your particular business.
- PAYROLL SEPARATION - If your policy has more than one classification code, payroll must be shown separately for each classification to take advantage of lower rated classifications. If not, all payroll may be assigned to the highest rated classification.
- EMPLOYEE TIPS – In certain states, tips declared by employees may be excluded from their gross payroll only if separately identified.
- OVERTIME PAY – In certain states, you can deduct the premium portion of overtime pay from the gross pay in calculating payroll. For example, if an employee is paid a regular rate of $10.00 per hour and receives time-and-a-half for overtime, the employee’s pay rate is $15.00 for each overtime hour. The $5.00 for each overtime hour can be deducted from your gross payroll only if it is shown separately on your records. You must show overtime separately for each classification.
- CERTIFICATES OF INSURANCE - Have certificates available for the audit (at your premises or your accountant's) to ensure that you aren’t billed for an extra premium unnecessarily. Certificates must cover the period when the subcontractor worked for you (this may require Certificates covering two different policy terms for the subcontractor in some cases). Also, the subcontractor must carry the same liability limits as your policy. For example - if you carry general liability limits of $ 1,000,000 per occurrence & $2,000,000 per aggregate your subcontractor will need those same amounts of liability coverage. If the subcontractor has employees, they must also carry the statutory limits for workers compensation coverage.
Commonly Asked Questions
Q: Why is an audit necessary?
A: To calculate the exact amount of premium that you must be charged. Actual exposures and operations are determined by an audit. After they are compared with initial estimates and later endorsements, an adjustment to premium is made via the Statement of Audit.
Q: What happens If I don't have Certificates of Insurance at audit time?
A: It is in your best interest to request a certificate from a subcontractor at the time the work is performed rather than at the time of audit. You will be charged for those subcontractors not providing General Liability certificates.
Q: Several of my employees do more than one type of work. How should I assign their payrolls?
A: If these employees are not in construction they will go into the highest rated class in which they work. Payrolls may be divided into appropriate construction classifications, provided the division is reflected in the original records in dollar amounts.