Why does insurance get audited
Business insurance policies like general liability, workers’ compensation, and your short-term disability policies will get audited on an annual basis.
They are auditable policies and it’s because the way these insurance policies are rated is based on different variables that could change on an annual basis like payroll or gross sales, number of employees.
These policies are also rated based on the type of work you do and if that changes a little bit, the rates need to be adjusted accordingly.
Insurance companies don’t want to be just basing these things off assumptions or estimates or guesses. They want to make sure that you pay for the actual exposure that’s there, not more or less than you should be doing, which is why they built these in on an annual auditable basis.
Worker’s Compensation
Worker’s compensation insurance is rated based on two important factors. The type of business you are, also known as a class and the exposure in that class, meaning payroll.
Many insurance policies will have multiple classes associated with it. The office workers are not rated the same as the roofing contractor.
Insurance audits will allow an insurance company to rate you on the type of work your employees are doing and the actual payroll you have for that year. This way you are not paying on assumptions or estimates.
A great tool to help prevent this is to be set up on a Pay As You Go Worker’s Compensation policy.
General Liability
Like Worker’s Compensation, General Liability insurance can also be audited on an annual basis for similar reasons. Depending on what your business does, your insurance could be rated on either payroll, the number of employees, or gross sales.
Many general liability policies will include factors for all of those things but the driving force is on gross sales.
The more sales your business does, the more exposure an insurance company has, meaning the more insurance premium you should pay.
If your sales go down, as does your risk exposure, meaning insurance premiums should go down.
It is important to know that your Liability Insurance policy may have a minimum premium. No matter how low your sales may be, you can only go as low as your minimum premium.
Every insurance carrier and every type of business may have a different threshold for that.
Disability Insurance
Short term disability and New York State’s Paid Family Coverage are also audited on an annual basis. This is the small insurance policy that your insurance agent said you need to package with your Worker’s Compensation. Short term disability has been around for years and is solely based on the number of male and female employees you have. NY’s PFL coverage is relatively new and is based on the amount of payroll you have for those employees.
This policy is either paid in full on an annual or quarterly basis. Annual payments due get less expensive rates.
What’s Next?
When you’re working with an independent insurance agent, you should be sitting down at least on an annual basis reviewing how your business insurance policies are rated, making sure that you know what your exposures are, how it’s rated, whether it’s payroll or gross sales, so that you aren’t surprised when you have that audit and you get an additional audited premium.
Surprise audits are one of the worst things you as a business owner can go through. Being prepared for the audit to happen but even more importantly, knowing when you are at risk for an additional premium and have the money saved for it.
If you have dealt with a surprising audit or don’t have a relationship with an agent and want a review on your insurance.
Click below to learn more about how to proceed.
