3 Tips for Avoiding Audit Surprises – Business Insurance Audits

Be as accurate as possible when estimating sales, payroll, and subcontracted costs at the beginning of the policy term. The more precise your estimates of these metrics, the less of an adjustment will be required at the audit. Don’t overestimate and overpay because that can impact cash flows; however, don’t significantly underestimate either because that can result in a large amount due when audited.  For example, a business estimates sales at $1,000,000, and the premium is $5,000. However, at the end of the policy term, the audited sales will be $2,000,000. The company now owes an additional $5,000 premium for the $1,000,000 in sales covered by the policy. This amount is due right away.

Get Certificates of Insurance for All Subcontractors

If your business hires subcontractors, collect a certificate of insurance upfront. Subcontractors who are not adequately insured may become the responsibility of the individual who hires them, which can result in an additional charge to your general liability and/or workers’ compensation premiums.

Review certificates to be sure that:

• Your company is listed as the certificate holder.
• If your company is listed as an additional insured, request a copy of the additional insured endorsement with the certificate.
• There is coverage for applicable general liability, auto liability, umbrella liability, and workers’ compensation. For workers’ compensation, if the subcontractor is a sole proprietor or partnership, ensure owners aren’t excluded from coverage; otherwise, they will be rated on and covered by your policy.
• Limits for applicable general liability, automobile liability, and umbrella liability are at the per-occurrence, aggregate, and product/completed operations aggregate levels that you expect and that are outlined in any contracts.

To ensure that coverage remains in place, it’s a good idea to set a follow-up procedure to obtain updated certificates before their expiration.

To ensure accuracy, we recommend that certificates only come from the insurance agency or company. Having certificate documentation will help prevent issues at the time of audit. Retain copies of certificates even after the job is complete in case a situation arises later, and you need to provide evidence that the subcontractor had insurance at that time.

Communicate With Your Insurance Agent

If you anticipate that your actuals will be significantly higher than the estimates used to set the policy premium, please contact your agent. You may land a big client and have an unexpected increase in sales or need to hire more employees due to an expansion. By adjusting your policy mid-term, you will avoid having a lump sum due while the premium is due for your renewing policy.

If you have questions about audits or your policies, please Contact Us for assistance.