A commercial insurance audit is performed either by the insurance carrier or a third party company with whom the insurance carrier hired to perform the audit. Audits are intended to ensure the policy in force reflects accurate exposures for rating and risk characteristics. Commercial insurance audits involve your workers compensation and general liability policies.
Why are audits important?
Audits are important because they ensure you are paying the proper premiums based on your exposures. Your exposures are referred to as your payroll (workers compensation) and sales figures (general liability) for that policy period. Generally audits are performed after the policy period but sometimes insurance carriers will perform a mid-term audit to ensure they have the adequate figures in place.
Example: If you estimate your sales to be 10 million dollars for the upcoming year but you ended with sales at 8 million, you should not be responsible for paying the premium based off of 10 million in sales. Your companies exposure is actually 8 million, thus a return premium will occur.
Not all audits are bad
Audits are intended to keep the insurance carriers and the insureds on the same page ensuring the premiums collected and premiums paid are reflected by their true sales and payrolls. Many insureds will find that if they project accurately in the beginning and keep clear lines of communication with their broker then the audit process will go a lot smoother.
Keep a clear line communication with your insurance broker and your insurance carrier. Sit down with your broker at the beginning of the policy period and put together a service audit review for each quarter. Service audit reviews are intended to review your sales & payroll figures to ensure accuracy throughout the policy period. Don’t let an audit catch you off guard, this will hurt cash flow and budget issues.