The word “audit” tends to invoke notions of painstaking information gathering, countless wasted hours sitting with pencil pushers who have no sense of humor and other such images. The truth of the matter is, if you and your agent have taken the time to accurately project your past year’s performance, the audit should be relatively pain free. Each year your company goes through the insurance renewal, and during this process your agent should be meeting with you to discuss any potential changes in your operation that will have a direct impact on payroll or sales. These are the two items primarily driving an audit.
A question that is frequently asked is: “Why are audits needed?” Audits determine the correct exposure or premium base for the insurance coverage afforded. Your premium was estimated when your policy was issued and will be adjusted accordingly based on the audit.
Many times, the easiest way to provide your agent with the information they are asking for is to base it off of the previous year’s performance. This can be a very slippery slope. For example, if you had a down year in 2009 and you used those numbers to project for 2010, but work has picked up, you could be in for a large audit at the end of the 2010 policy term. Conversely, if you were one of the few companies who had a good year in 2009, but business is now down in 2010 you could be paying more in monthly premiums than needed.
Types of Policies
There are two types of policies available:
- Auditable: The company will send someone out to meet with you shortly after the policy expiration to determine if you have underpaid or overpaid. After this meeting you either receive premium back as you overpaid, or you receive a bill showing you owe additional premium as your projections fell short.
- Non-Auditable or Flat: Based strictly on your estimates with no audit at the end of the policy term.
Audits typically apply to policies such as General Liability, Worker’s Compensation and Umbrella or Excess coverage. Auto and Inland Marine/ Contractor’s Equipment policies are auditable as well; however, any changes you make to these policies during the policy term tend to be applied immediately.
A Policy Comparison
Both auditable and non-auditable policies have their pluses and minuses. Yes, auditable policies do mean at some point the company owner, controller or office manager are going to have to meet with the auditor and provide them with the necessary information: financials, payroll documentation, certificates from subcontractors, etc. It is time consuming and can be quite aggravating. It can also end up costing you additional premium if your sales, payrolls, etc. were more than you anticipated, or if you have used an uninsured subcontractor. The flip side of this coin is if you overestimated your sales, payrolls, etc., you could be entitled to receive some premium dollars back.
Non-Auditable polices are just that, not auditable. They allow the premium to be based off of your estimates for the coming year. The benefit here is should you overproduce your estimate number, you do not owe any additional premiums; however, if you under produce your estimates, you will not get any return premium.