Everything You Need to Know About Your Insurance Audit

What Is An Insurance Audit?

Insurance audits are typically performed on commercial insurance policies providing auto, general liability, garage liability, umbrella, and workers compensation coverages. When these policies are issued, you are asked to pay an estimated premium. Estimated 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, an audit is conducted by the insuring company to collect information on actual exposures and operations and then a final premium is determined. The difference in the estimate and the final premium will be either refunded or billed to you. This allows your insurance to accurately reflect your business’s fluctuations in payroll and business growth or downsizing.

When And How Will The Audit Be Done?

An audit will be performed shortly after your policy expires, usually within 30 days of the expiration date. Smaller, less complex businesses may only require that you assemble and send the necessary information to the insurer or have the information available when a telephone auditor calls. Larger and more complicated policies are handled by a field auditor, who will schedule an appointment and visit your business. If you must change or cancel a scheduled appointment, please advise the auditor as far in advance as possible.

It is important for the auditor to ask questions about your operations. This allows them to full understand the scope and intricacies of your company. If you cannot be present to answer questions, someone familiar with the specifics of your entire business operations should be available. If you direct the auditor to your accountant, they will obtain as much information as possible from them and contact you directly with any additional questions that they may have.

Most audits take a half hour or less when you are well prepared, but audits of larger policies may take more time. Though the auditor will have a number of questions, you will not have to be directly involved during the entire audit if adequate records are available.

What Records Are Needed?

Good record keeping is important to the audit process. Accurate records provide and confirm information, save time, and may minimize your insurance costs. The premium auditor will let you know which of the following records will be needed for your audit when the audit appointment is made.

  • Payroll Records: Include a payroll journal and summary, federal tax records (941’s), state unemployment reports, and individual earnings records in your record. Totals should also be kept for overtime when applicable.
  • Employee Records: Include the number of employees and their hours worked annually. This will make the audit process easier and is also a good accounting practice.
  • Sales Journal: Include a record of all goods or products sold, rented, and distributed as well as services, repairs, and installations. Sales or excise taxes collected separately and submitted to the government need to be identified in order to be excluded.
  • Check and Cash Disbursements: Keep a record showing subcontractors payments, material costs, and payments for casual labor.
  • Certificates of Insurance: Keep track of the insurance coverages for subcontractors used during the policy period for construction, erection, and repair. Proof of general liability and workers compensation coverage for them will keep you from paying to cover them.
  • Income Statements: Include subcontracted costs used to determine the cost of hired autos for commercial automobile audits.

How Can You Save Money?

There are several ways you can save on your final premium depending on the type of business and coverages you have. Some of the following may apply to your business:

  • Payroll Division – A single employee’s payroll can be divided into two or more categories unless they work in a clerical, sales, drafting, or driving position. Proper records must be kept in dollar amounts that reflect work actually performed before a breakdown can be applied. Without adequate records, the entire payroll for the employee must be placed in the highest rated classification.
  • Employee Tips – Tips declared by employees may be excluded from their gross payroll only if separately identified.
  • Certificates of Insurance – Have certificates of insurance available for the audit at your premises (or your accountant’s) to ensure that charges are not made unnecessarily. Certificates must cover two different policy terms for the subcontractor in some cases.
  • Drivers – For general liability coverage, employees with the sole responsibility of driving may often be excluded from chargeable payroll if their wages are shown separately. However, employees who perform other duties besides driving must be placed in the highest rated class describing their duties.
  • Cost of Hire – This is commonly used on commercial automobile policies as a premium basis for hired auto coverage. This includes automobiles and trailers used under contract on behalf of or loaned to the named insured, which may include rental units as well as subcontracted hauling for the insured.

Definitions

Remuneration (or Payroll): This includes wages, commissions, bonuses, overtime pay, pay for holidays, vacations and sickness, payment for piece work, value of meals and lodging, and other substitutes for money. Substitutes for money include draws, dividends, traveling expenses and travel time payments, gift certificates or merchandise credits, annuities, and contributions to individual retirement accounts. This list is not all inclusive but represents common substitutes for money. Your premium auditor will discuss this with you at the time of your audit.

Overtime: The hours worked for which there is an increase in the rate of pay. It includes:

  • Work in excess of 8 hours per day or 40 hours per week.
  • Work on Saturdays, Sundays, or holidays.
  • Work in any day or week in excess of a guaranteed wage agreement.

Extra pay for shift is differential and is not considered overtime.

Ordinarily, overtime is equal to 1.5 times the regular hourly rate. For example, a regular pay rate of $10 per hour at time and a half generates a $15 per hour overtime rate. If the extra $5 of pay is shown separately, it is excluded in total. If total overtime wage is shown in a combined amount of $15 (regular pay plus increase) and included in gross payroll, the additional $5 will be deducted from gross pay. This bookkeeping distinction is important to remember to ensure that your final premium is not based on an incorrect payroll.

An insurance audit’s bark is worse than its bite. When you are prepared with the proper bookkeeping they are as routine as balancing a checkbook, so be sure to keep up with your business logs and you will be ready for this process when it comes along.

***Information courtesy of Auto-Owners Insurance***

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