Insurance Premium Audit
Reduce your insurance costs
By Robert Jones
When business owners hear the word “audit,” they typically have an unfavorable reaction and the Internal Revenue Service comes to mind. But there is also something called the Insurance Premium Audit. And, unlike a tax audit, this is the report of the findings from an examination of a business’ operation to determine the actual insurance exposures for the coverages provided.
An audit is necessary to determine the correct exposure or premium base for the insurance coverage afforded. If necessary, an adjustment will be made to the premium that was estimated when the policy was originally issued.
An insurance premium audit is scheduled after the expiration of a policy with a variable or changeable premium base.
Some coverages subject to auditing are:
- Workers’ compensation
- General liability
- Premises operation liability
- Products completed operations
- Garage liability
- Automobile liability
A premium auditor will examine and audit all of a business’ records that relate to its insurance policy. The records needed will vary depending on the type of coverage a business has. In most cases, though, the premium auditor is able to obtain the necessary audit data form using two or more of the following records:
- Journals
- Ledgers
- Tax reports
- Individual earning cards
- Vehicle titles
- Registrations
- Ownership tax receipts
Many of the premiums for a business’ insurance are based on payroll, which is defined as total remuneration for services performed by an employee. In most states remuneration means money or substitutes for money and includes such items as wages, bonuses, commissions, vacation, holiday and sick pay, overtime, profit sharing plans, tool allowances and other dollar-value substitutes.
By maintaining payroll records in accordance with the following guidelines, a business owner may reduce insurance costs.
Overtime: In most states, the amount paid in excess of straight time can be deducted if the excess can be verified in records. A business must maintain records to show overtime pay separately by employee and in summary by classification of work.
Division of Payroll: Except for construction, erection or stevedoring operations, division of an individual employee’s payroll is not allowed. In the above cases, records must show the number of hours and amount of payroll for each type of work. If such a breakdown is not kept, the full salary must be charged to the highest rated classification to which the employee is exposed.
Subcontractors: Under most workers’ compensation laws, a business is held responsible when an uninsured contractor’s employee is injured. However, a business can protect itself by securing a Certificate of Insurance from each subcontractor it sues. If such evidence of insurance is not available at the time of an audit, the subcontractor’s payroll must be added to the business’ premium. These rules also apply to a business’ general liability laws.
The content of this article follows general insurance principles, and is not intended to supersede any definitions or conditions in your policy. Any questions concerning your insurance coverage should be brought to your agent’s attention. Sources for this article are from The Independent Insurance Agents of America and the Premium Audit Advisory Service.
Robert Jones is program manager for Worldlink Specialty Insurance Services Inc. The Newport Beach, Calif.-based company specializes in the design, implementation, marketing and underwriting of insurance program for various industry and affinity groups. To learn about Worldlink’s Door Pro Insurance Program, call 888.975.3565, ext. 302; visit www.worldlinkinsurance.com.
