Wednesday, July 22, 2009

The Insurance Auditor Cometh. The End is Nigh.



Your policy year just ended, and you're all renewed for the new year. I hope it wasn't too painless. However, your journey is not yet complete. You are about to be visited by a harbinger of goodwill and efficiency. . .the Insurance Auditor!

Auditors are the eyes and ears of your insurance carrier. Their reports have caused premiums to double and coverages to cancel. Be afraid. Be very afraid.

At the start of the policy, your Agent submits information about your company to the Underwriter. To get an accurate quote, we tell them everything about your company: products, operations, locations, radius, # of employees, limits, estimated payroll, gross sales, etc. Your policy premium is based on these estimates.

The carrier then dispatches their personnel to verify that your Agent was telling the truth. The Auditor physically inspects your work site or office and interviews you about your operations. They review your books to verify the actual premium basis of the particular policy. For Workers' Compensation policies, your friendly Auditor is reviewing payrolls. For General Liability, he or she could be looking at payrolls or gross sales. Other types of policies are auditable, but Work Comp and GL are the most common. The intent of the audit is to ensure that your insurance company is getting accurate premium for their exposure to loss.

For example, if I report that a contractor has $50,000 in Carpentry payroll, then the insurance company assumes that they are insuring 1-2 employees against injury. If they actually have $500,000 in payroll, then the insurance company's exposure to loss is much higher. More swinging hammers means more potential smashed thumbs. The insurance carrier is entitled to the proper premium dollars to fund those potential losses.

The audit is a requirement of all auditable policies. Resistance is futile. If your actual payroll or sales figure is higher than the original policy estimate, then the insurance company will bill you for the additional premium. If your actual figure is lower, then you can expect a refund from the company.

Your Auditor will ask to review any or all of the following items:

  1. Quarterly payroll tax reports (IRS-941s and/or State Unemployment Statements)
  2. Individual payroll records for each individual employed by the company during the policy period

  3. Overtime reports

  4. Names of Subcontractors and amounts paid to each during policy period

  5. Certificates of Insurance for the Subcontractors on your list (see Service & Sub Contractor Insurance Guide, 4/30/09 post)

  6. General Ledger

  7. 1099s & W2 forms

  8. Cash Disbursements Journal

  9. List of Company owners, partners, officers - including amounts paid & duties

  10. Employee list and job description

  11. Description of company operations
To be fair, not all Auditors are antagonistic bookworms. They are paid by the insurance company to make sure the policyholders are staying honest. If insurance companies did not collect the proper premium dollars to pay losses, then they'd all go out of business. The sky would fall, and chaos would reign. Your Auditor can be your friend or your worst nightmare. Many of them will work with you. They will recommend ways that you can protect yourself against radical premium increases. They may let a few things pass.

How will you survive? Don't panic. We'll get through this together. Start compiling this information, and I'll tell you how to present it. Stay tuned...

In the meantime, tell me about your audit experiences. Did you prepare? Did the Auditor sit in your office for hours? Was the Auditor a good cop or bad cop?

2 comments:

  1. Definitely a good cop! It was relatively painless:)I also now know the difference between an audit survey and a premium audit!

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  2. Thanks for the comment, Jessica. Many auditors are low-key and cooperative. I've had good results when my clients summarize the information to present at audit. This way, auditors don't have to dig too deeply. If the information is "giftwrapped" for them, they will plug it in and move on to the next one.

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