When you get a commercial insurance policy, in many cases premium assigned isn’t final. It’s actually an estimate. Your carrier assigns a premium based on an informed guess, based on your prior year business activities. Business changes, of course, and estimates can be off. The purpose of insurance premium audits is to use actual sales and operations data to determine how accurate their guess was. The audit then determines the amount of your final premium.
At the end of the process, you could wind up with a balance due, meaning you underpaid premiums for the year, or you could wind up with a credit. This means you overpaid your premiums for the year and the carrier is either crediting or refunding your overpayment to you.
These audits are very common when it comes to General Liability insurance, liquor liability insurance, workers compensation insurance and similar commercial/business insurance policies.
Ask your agent what the basis is for your premiums. Your exposure basis is the data that the insurance company uses to calculate its expected risk, and with that the premiums to cover that risk. Examples include payroll data, sales data, square footage, vehicle counts and/or mileage data, and the like. They may also ask for a description of your operations, information about the officers and owners of the company, job duties, names of subcontractors, certificates of insurance for subcontractors, and/or tax documents.
Contractors should pay special attention to subs as the payments to subs will have an impact at audit. Uninsured subs can have a really significant impact.
Make sure your figures for the audit are as exact as possible. If you asked up front exactly what your premium basis was, you shouldn’t have to use estimates. If you do, or if the carrier feels they are not quite getting the full story, they will request further information, or they could wind up charging a higher premium to compensate for the underwriting uncertainty.
Workers Compensation Insurance
Since workers compensation policies are based entirely on payroll data, payroll audits are very common, and if you keep good records, fairly simple. The carrier can audit on a yearly, quarterly or monthly basis, and your premium will be adjusted up or down based on the last period’s audit. In many cases, this auditing process has become fully automated.
Commercial liability carriers usually base their premiums on sales levels. Occasionally they’ll ask for some other data including square footage or payroll data – especially during the early months of the policy period, or if you’ve expanded floor space.
Cargo insurance is generally based on shipping volume or overall valuation of goods shipped.
Liquor Liability Insurance
Carriers vary, but premium basis usually includes gross sales, broken down between alcohol gross sales, non-alcoholic beverage sales and food sales, along with some operations information. Your insurance agent should be able to tell you at the beginning of the term what information to have available for the premium audit.
• When you apply for coverage, ask exactly what the premium basis is. This way, you know exactly what numbers you need to have on hand when it comes time for the premium audit, and the process should go quickly and smoothly.
• Keep track of time and payroll for different kinds of work, job categories, etc. This allows for the lowest workers compensation premiums that still provide protection for workers and the company alike. Include overtime.
• Get certificates of insurance for your subcontractors: General liability and workers compensation.
• Ensure a responsible and informed individual is present and available for on-site audits.
• Restaurants should keep tip records.
• Inform your agent right away about any large changes to your payroll, whether up or down.