Insurance Premium Audits

Insurance Premium Audits of a company’s payroll and sales – what are they, why are they important, what happens if you ignore them and more, coming right up.

Hi, I’m Gordon Coyle, welcome to my website where we talk about the risk and insurance issues on the minds of business owners. As an expert business insurance broker these videos are intended to help guide and educate decision makers to help make you a more informed insurance buyer. If I don’t answer the question on your mind that brought you to this video, reach out and let’s connect. I’d love to hear from you.

Estimated Basis, what is that?

So most general liability, workers compensation and business owners policies are written on what is know as an “estimated basis”.

At the beginning of the policy term a rating basis such as sales or payroll is used to formulate the premium you’ll pay for the year. In fact, in most policies you’ll see “estimated premium” used in the premium development and wonder why is it an estimate? Why isn’t it a firm number?

The reason it’s estimated is because the rating basis – payroll or sales – is what’s estimated – you don’t know what your actual payroll or sales will be during the coming year so an estimate is used. At the end of the year an audit will determine your actual exposure basis and if it’s more than the estimate then you’ll get an additional premium at audit. If it’s actually less than the estimate you’ll get a refund from the insurance premium audits.

Insurance Premium Audits are all about fairness

Everyone pays their fair share based on their rating exposures.

About a month or so after the policy close or expiration you’ll get notified by your insurer that they want to do an audit and ask you for certain records to substantiate your payroll and sales. In some years an auditor will physically come to your business to perform what’s known as a physical audit, in most years they’ll ask you to send them the documents they need. That could be payroll records, tax receipts, ledgers, etc.

What often will happen is that a client will forget to get this information to the auditor in a timely manner so the auditor will send a reminder and if the insured doesn’t comply the insurance company audit department will do their own estimate of your sales or payroll and that is often two times what your policy started out with, so you’ll get an additional audit premium bill amount equal to what you already paid – so if your workers comp premium was $15,000 for the year and you paid all that, you’ll get an audit bill for another $15,000 and it’s due in 30 days.

Some insurers can be even more punitive and bill even more than 2 times the annual premium.

Is that it?

Do you have to pay Estimated Insurance Audits?

No, not necessarily, this is the audit department’s way of getting your attention so you give them the info they need to perform an actual audit, leading to an insurance premium. So, yes, the bill will be adjusted, but what I want to mention here is that you shouldn’t let audits get to this point.

I realize everyone is busy, but ignoring audits and getting to this estimated stage will throw up red flags for underwriters on your next renewal. Not only does ignoring audits cause a lot of extra work and frustration for everyone involved, including your agent, but it also increases your chances of paying more, or jeopardizing a renewal down the road.

Why?

Because underwriters view this as what is known as “non-compliant” behavior and they’ll charge more because of it, and if it happens repeatedly many insurers will just non-renew your account. it’s a situation you want to avoid for sure.

Here’s the bottom line on insurance premium audits.

Audits are a function of paying premiums based on your actual exposures which can only be determined by the audit process, leading to more accurate insurance premium audits. It’s something that can’t be ignored or put off, so I highly recommend complying with requests you get from your insurance company’s audit department.

Now, one big important point here is that if your company is experiencing great growth in payroll or sales or both during a policy year, I would recommend speaking with your agent about it as it’s happening.

Say you’re seeing 50% growth in month 6 of your policies and you speak to your agent about it, they can do a mid-term adjustment so that you can pay that anticipated increase in premium over the remaining installments. If you wait for the audit to happen that will be due within 30 days of it being posted. Which means your audit premium will land on your desk a month or so after you just paid your renewal deposits. You may have just laid out 20% or more and now you’ve got another big insurance bill to pay. Do yourself a favor and keep this in mind for the future so you don’t get stuck in this cash flow trap.

I hope that was helpful, but if there are any questions or issues I didn’t answer here, please let me know. Thanks!