Audits

How to prepare for your annual premium audit
Most insurance policies have a provision that allows the insurance company to Audit your books at the end of the year to determine if any more or loss premium is due.  Before you panic, there is good news here: many times if you estimated your payroll to be much higher than you actually had, then you may be entitled to a refund.  Unfortunately if you UNDERestimated your payroll, then you may owe the insurance company a few dollars too.

Please note that if you are a one man operation, your General Liability policy is "capped" at only 16,700 in payroll, which means it is RARE that you may have an audit that could cause you any problems on your General Liability.  Work Comp however could be another story.

Why do the insurance companies do this? 
Since your annual premium is based on either payroll or gross receipts, this ensures that everbody doesn't go around and say they only made "$132 last year".  This also keeps you from funding someone elses premium who would otherwise underreport their payroll while you are being honest.

So what typically happens in an audit?
A professional auditor will contact you in advance generally 1-2 weeks prior to the planned audit appointment date. Typically the named contact will receive a scheduling letter in the mail from the auditor. The purpose of this letter is to request your assistance with promptly scheduling an audit appointment and to a
dvise you what records will be needed for accurate completion of your premium audit.  Beware that some auditors are better than others.  You may request a different auditor each following year until you find one you can work well with.  Usually that change can not be made for the current year.

How to get ready:
To assist you become even more prepared, we have compiled a list of commonly requested financial documents needed for a premium audit. Organizing this information throughout your policy year then having it ready for the auditor on the audit date, will help expedite the process. The auditor should be able to complete the audit at the initial appointment. As a helpful reminder, be sure to review the auditor's findings (payroll totals, sub costs, employee classification, etc.) before his/her departure. Reviewing the audit with the premium auditor is very important for proper policy coverage and premium basis. Requested documents/records may include:


Payroll records

  • Quickbooks report
  • Payroll registers (ADP, Paychex, etc)
  • Manual payroll sheets or payroll book

Quarterly reports for verification of payroll

  • FL DOL quarterly reports provide list of each employee by name and wage
  • Employer's Federal 941 quarterly reports provide lump sum wages paid for all employees

Records that provide the amounts paid to subcontractors or contract labor

  • Quickbooks vendor transaction reports/summary
  • General ledger or cash disbursements journal
  • Check stubs or check register
  • Other vendor detail that reflects payments to subcontractors
  • 1099s are not adequate records as they do not reflect payments less than $600 nor do they include corporations

Certificates of Insurance

  • Subcontractor Coverage Certificates need to reflect coverage during your policy period

Other

  • Financial statement to verify total subcontract cost or receipts
  • Tax records to verify no employee payroll (Schedule C for sole proprietor, form 1120 for corporations)
  • If you report your payroll monthly, have all 12 months of MSRs available at the audit
Subcontractors   
Work completed by hired subcontractors is in fact auditable exposure. A Certificate of Insurance for workers' compensation coverage and/or general liability is required from all subcontractors covering the time period each one worked for you. If no certificate is in your possession at the time of the audit you, the contractor/policyholder, are required to pay the workers' compensation premium for the subcontractor for the time worked. you should obtain from your hired subcontractors or independent contractors showing proof of their coverage.

Most Carriers require all subcontractors to have workers' compensation coverage, even if they have no employees and are considered independent contractors, otherwise you will be responsible for paying the premium due. Beware that some insurance companies may not accept exclusion forms from independent contractors.

Certificates of Insurance
Any certificate you are provided should be the original certificate, not a fax or a photocopy. The certificate should indicate your company as the certificate holder. It is suggested you periodically check with the subcontractor's insurance carrier to be sure the policy remains in effect.

The certificates must reflect coverage for the same time period that your policy was in effect. That frequently means that you will need to provide certificates that reflect two years of coverage for the subcontractor.

Not acceptable
  • Those that show NCCI as the insurance company name. NCCI is not an insurance company
  • Those that show TBA (to be assigned) or TBD (to be determined) as the insurance company
  • For GL, most will not accept limits of liability less than $1,000,000.
  • Certificates of insurance that show a different named insured than to whom the payment was made. For example, the check was made out to Jim Smith but the certificate of insurance reads Smith Plumbing, Inc. This is not acceptable as the coverage is afforded for the corporation, not for Jim Smith as a sole proprietor or entity. The reverse would also apply. If the check was made out to Smith Plumbing, Inc but the certificate shows Jim Smith, it would not be accepted.
  • Waivers of insurance
  • When the subcontractor uses an Employee Leasing Company or PEO, if the certificate does not extend coverage by specifically designating the subcontractor on the COI, we will not accept.

If your company primarily conducts business in the state of Florida; by entering the following address into your web browser allows you to follow up on the status of or existing insurance coverage from your subcontractors by doing a
company name search. This type of information can be accessed in other states by visiting their specific government website.

Note: As mentioned above, in some instances it may be necessary for you to obtain two Certificates of Insurance from a subcontractor whose policy effective date overlaps your effective date. For example: If your policy date is July 1, 2008 to July 1, 2009 and the subcontractor's policy renewed on January 1, 2009 then you will need certificates for the January 1, 2008 to January 1, 2009 and the January 1, 2009 to January 1, 2010 policy terms.

Additional Groundwork  

These steps may assist you to eliminate the stress associated with lack of planning before and during your premium audit is conducted:
  • Provide your agent/broker with a complete description of operations or business, which will be used to determine applicable classifications.
  • Provide your agent/broker with realistic estimated payroll and other applicable exposures. A realistic exposure estimate will reduce the chance of large variation in audited versus estimated exposure at policy expiration.
  • Provide your agent/broker with updates regarding any change in operations including ownership changes, large changes in your labor force, establishment of another operation in another state, etc.; this will ensure the issuance of applicable coverage endorsements prior to policy expiration.
  • Properly maintain records required for audit with details about job categories, department breakdowns and information about key employees including their actual duties to allow for applicable adjustments to gross payroll.
  • Upon contact by your insurance audit professional for an audit appointment, provide contact information for your accountant if you do not maintain your business records so as to facilitate the timely completion of your audit. Be prepared to answer additional questions with respect to personnel and job categories after the audit is completed with your accountant.
  • Actively participate in the audit process or delegate to a responsible party when your insurance premium audit professional contacts you for an appointment.
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