Many business insurance policies are subject to audit by the insurance company. Initial premiums are calculated from revenue, payroll or other estimates. These estimates can change and, no surprise, the insurer wants more premium!
What can go wrong?
- Revenue and payroll estimates can go up or down. While they’ll want additional premium for “up,” you’ll almost never get a return for “down.” So, Rule #1 is always be conservative in your initial estimates.
- Certain types of work are excluded from your policy coverage – for example construction work when an owner or General Contractor (GC) provides coverage under an Owner-Controlled Insurance Program (OCIP). Because your insurer doesn’t cover you here, you should not report revenue or payroll from these jobs. Rule #2 is be sure to segregate your revenue and payroll for non-covered jobs. Get detailed advice – in advance – from your insurance professional.
- Workers’ Compensation (WC) insurers often mail an audit form with no instructions. If business owners have “opted out” of the WC coverage, then do NOT include these salary dollars in your audit submission. If you have overtime to report, note that you only report “straight time” salaries for these hours. The insurers’ audit department won’t read your policy; they’ll just send you an invoice for all these additional salaries. Rule #3 is carefully differentiate your payroll system so you can easily pull out these salaries and not over-report. Again get some professional advice!
- Another type of WC audit can be a killer if you’re not prepared. State rating organizations (like the WCIRB in CA) are beginning to aggressively visit workplaces and interview employers and employees. They want to know exactly what work is being performed and who’s doing what. They can and will assign the most “dangerous” (and expensive) classification if they think something is amiss. This can mean thousands in additional – and retro-active premiums. Rule #4 is know your classifications, have up-to-date job descriptions and make sure employees understand them. Don’t assign the receptionist to pick up FedEx packages in the warehouse, for example: she or he will no longer be “clerical.”
- Finally, note that insurers often use sub contractors to do premium audit work and they get paid based on the number of audits they perform. That can mean they move quickly, don’t give a lot of explanations, often take the first (or largest) numbers they see, make their calculations, and move on. Rule #5 is do not leave the auditors alone with your books or files! Ask questions, provide only the specific answers they need and get copies of their worksheets before they leave. This isn’t hard, but if you’re inexperienced, get your broker or risk manager to sit in on the meeting and provide guidance.
Have you had experiences like these – or others? What were the outcomes? Do you think you got a fair shake?