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"Insurance audits are the best!" said no one ever. As an Insurance Agent, I realize this fact of life and have dedicated myself to improving the audit experience from "wretched" to just "mildly annoying."
Workers' Compensation policy premiums are based on "remuneration" (explained below). You pay your initial premium based on an estimate for the upcoming year. Once the policy expires, the insurance company sends an Auditor to total the actual numbers for the period. The insurance company then adjusts the premium based on the actual numbers vs the estimate. If the actuals are higher, they send you a bill. If the actuals are lower, you get a credit or a refund.
General Liability (GL) policies are also based on estimated exposures including payroll, gross sales and subcontracted costs. Other types of policies can be audited as well. This discussion focuses mainly on Work Comp.
The best approach to an audit is prepare, prepare, prepare! Auditors are people, too. They don't want to sit there for a prolonged interview any more than you do. They are often juggling busy schedules and need to get to their next appointments. The more homework you do in advance; the shorter and sweeter the audit experience will be. I promise!
Your Auditor will send a letter asking for specific reports, including:
TIP: Respond to the audit request! If they don't hear back from you, they will return the audit as NONCOMPLIANT. Insurance companies assess Audit Noncompliance Charges, which can be flat fees or a multiplying factor of the policy payroll. Essentially, they double your premium and send you the bill.
Many factors go into that final audit number. Here's a few to keep in mind:
Policy premiums are not based just on gross pay. Remuneration also includes bonuses, overtime, commissions, sick pay and vacation pay. Include those numbers in your payroll summaries.
TIP: Separate Overtime! When summarizing total remuneration for the Auditor, be sure to break out Overtime. Auditors reduce the Overtime number back down to straight pay for the audit. If you lump OT in with the rest of the payroll figures, then you won't receive the benefit of that deduction. They need to see a record of it, however. They won't just take it on faith.
On Work Comp and General Liability policies, employees are grouped into different class codes according to their duties. Each class code carries a different rate based on the history of claims paid for that work. Familiarize yourself with the class codes used in your industry. Summarize your employees & payroll by class code in advance. Auditors check to make sure that employees are classified correctly. They will ask you to describe their duties, and they WILL make changes based on the info that you give them. Those changes could result in a huge audit bill. If you've summarized the employees by duties in advance, then it will help to reduce the questioning.
TIP: Document hours worked for different jobs! Employees' work is often a mix between high hazard and low hazard. Insurance companies will lump all of the payroll into the highest hazard code. Some class codes do allow for a split between individual employees or crews. Make sure you can document the hours worked on the high hazard vs the low hazard. Auditors will not split anything without documentation to back it up.
If you use subcontractors in your business, make sure they provide you with a Certificate of Insurance (COI) that shows Work Comp and General Liability insurance. If your Sub does not have their own coverage, then the insurance company will add their cost to your policy premium basis. Some Subs are individuals and often not legally required to carry Work Comp. That doesn't matter to the insurance company. That Sub could file a claim against your policy if they are injured while working for you. Insurance companies need to charge premium for that exposure.
Uninsured sub costs will create big audit bills for you. Uninsured sub claims will go on your policy record and affect your rates for years to come. Make them carry their own coverage, so their company will pay the claim - not yours.
Please refer to our Workers Compensation Audits youtube video for more information about this topic: Youtube.com/Insurance-in-an-instant
I'm just scratching the surface here, but hopefully this information will help you when the Auditor comes a-calling. Please don't hesitate to reach out to us if you have any questions. Good luck!!