Insurance Premium Audits- For information only.
What Is an Insurance Premium Audit? Workers' Compensation is an obligation imposed upon employers by state, in general, most states impose Workers' Compensation obligations once a business has employees.
The primary purpose of a premium audit is to calculate your final premium. When your policy was issued, the premium was an estimate of an exposure basis (usually payroll or sales) multiplied by a rate. The rate used is determined by how the exposure base is classified. The audit will examine your records to establish the actual exposure basis and make sure that the correct classification codes and rates are used in determining your final premium. Because the original premium was an estimate, the audit will most likely result in a change of premium and/or classifications for your business. By auditing these policies, we can make sure that your business pays the correct premium. Typically, information from the audit will generate either a bill or a refund. You will be contacted about completing a premium audit any time after the policy expires or is canceled.
Physical Insurance Audit: A physical audit is an on-site review of your business records by a representative. If your business records are located at an address other than your policy address, such as an outside accountant, owner’s home, or consultant, please notify the auditor.
Payroll- Payroll premium bases are used for Workers Compensation and Commercial General Liability policies. Payroll includes, but is not limited to: hourly and salaried payroll, bonuses, holiday pay, sick pay, vacation pay, commissions, piece work and profit sharing. Also included in the payroll premium base are meals and housing provided for employees, allowances for hand tools, expense allowances not based on receipts, and amounts used to reduce taxable wages such as cafeteria plans and deferred compensation plans. Payroll excludes tips and overtime premium.
Gross Sales- Gross sales premium bases are commonly used for Commercial General Liability. Gross sales include, but are not limited to, total amounts charged for all goods and products sold and services performed. Gross sales exclude sales tax, returns and allowances. Cash discounts are not excluded.
Subcontractors- If you are a contractor, you must obtain Workers Compensation and General Liability certificates of insurance for all subcontractors hired. If the subcontractor does not provide you with a valid (must match audited period) certificate of insurance/exempt certificate, they will be treated as your employee and a premium will be charged for them. The premium for uninsured subcontractors can be substantial, so it is to your advantage to obtain proof of insurance from subcontractors. Uninsured subcontractors covered under the principal contractor’s policy are classified based on the classifications that would apply if the principal’s own employees performed the work.
Information Requested at Time of Insurance Premium Audit- Listed below is typical information an auditor may request at the time of audit. If there are multiple companies or multiple entities insured under one policy, the auditor will request this information for each company or entity. General Information • Description of company operations • Officers/owners/employees names, titles and job duties • Number of employees at each location • Names of subcontractors and certificates of insurance for subcontractors Payroll Records • Gross pay totals for the audited period including, but not limited to: bonuses, commissions, holiday pay, sick pay, overtime pay, vacation pay and all pretax amounts • Pretax/Section 125 amounts/401(k) amounts • Overtime pay shown separately Subcontractor Information • General ledger, cash disbursements book and checkbook register Tax Documents to Verify Payroll/Sales Records and Federal ID Number • RT-6’s, 941, 940, 1099, W-2, W-3, income tax return, etc. Sales • Gross sales for each type of service provided/work performed by location • Profit and loss statement • General ledger.
Additional Information Requested for Restaurant, Tavern & Fast Food Audits • Tips shown separately • Number of free meals given to employees • Live entertainment • Liquor sales and total sales to determine proper class for Workers Compensation.
Helpful Tips for Insured
- Usually the auditor will try to make up to three attends to the insured by phone, email or mail and one to the agent before returning the audit as uncooperative.
- Simplify the Auditors job. The auditor is on a very strict time schedule and a limited time per audit. Traffic, weather, parking or previous audits may delate the auditor’s time of arrival.
- Have all the information the auditor requested organized for use (no more than requested).
- Separate overtime paid to employees and summarize the overtime by job classification.
- Have valid certificates of insurance/exemptions for every subcontractor during the audit period.
- Answer all necessary questions about your business operations and records.
- If a physical audit is being completed you want to do everything you can to make sure the auditors get any missing information in a timely manner (24-48hrs).
- Be prepared. Do not blow the auditor off and make them have to reschedule. Time is valuable. A happy auditor leads to a good audit!
- Sometime a postpone audit may result in uncooperative/incomplete audit.
- Many auditors prefer to just gather data then take it to the office and finish it up.
- You will be asked to sign the auditor’s worksheet and show valid Id before they leave.
- Be aware that every industry has its own financial ratios, is the revenues to payroll ratio in your industry is 33% and your business shows a lower percentage, you may trigger a Pandora’s box.
- Incomplete or uncooperative audit may result in policy cancelation or up to triple your premium cost and wasting additional time for insured and carrier.
This page is for a complimentary information only by Advance Business Consulting.