What is an business insurance audit and how does it effect you?
Do you know what a general liability insurance audit is? Insurance carriers conduct audits in order to assess risk. In other words, the insurance company wants to know what they are actually insuring in dollars. These are typically conducted yearly, near the end of the year or when your policy expires, and they are used to assess general liability, workers compensation, commercial car insurance, commercial property insurance and umbrella insurance.
The Purpose of an Insurance Audit
The purpose of an insurance audit is to ensure that you have the right coverage, and you are paying the correct amount for your premium. For example, let’s say that during the course of the year, you hired ten additional employees. These employees need to be included in the insurance policy. Conversely, if your gross sales decreased or you let several employees go, that would need to be reflected in the policy.
What Happens at the End of the Audit
Depending on the results of the insurance audit, you could get a refund on premiums paid, or you may need to pay an additional premium.
Items that Are Reviewed During an Insurance Audit
The best way to ensure that your insurance audit goes smoothly is to make sure you have the appropriate records available and that they are accurate and up to date. Insurance auditors typically look at:
- Payroll Records – Includes hours worked, applicable overtime, unemployment records, federal tax reports and records of individual employee earnings.
- Employee Records – Number of employees and the number of hours they’ve worked.
- Gross Sales – All products and services that have been sold or rented, including all applicable taxes on those sales and rentals.
- Contractor/Subcontractor Records – Information on all contractors and subcontractors hired for projects inside your building.
- Certificates of Insurance – Records of the insurance policies for the contractors that worked on the building.
An Example of an Insurance Audit for a Property Management Company
Property management companies incur all the costs and sales listed above. When an insurance company performs an audit, they want to look at certain risks, including the costs and documents associated with:
- Any Accounting Services Used
- Cleaning the Property or Janitorial Work
- Costs and Records Associated with Landscaping and Lawn Care
- Documents Related to Leasing and Renting Properties
- Maintaining and Repairing the Property
All of these risk factors are under General Liability Code 47052 and must be assessed by the insurance company. It’s important to note that Code 46052 does not pertain to the addition of new buildings or construction on the properties.
While this sounds complicated, the result is simply dollars spent versus dollars earned, and the resulting calculation is gross sales. However, if the dollars are improperly classified, it could result in confusion.
For example, a property management company was undergoing an insurance audit. They had two income classifications for gross sales.
- Fees Charged – $400,000
- Reimbursements – $2,000,000
The insurance auditor was confused by the reimbursements category. What was the property management company being reimbursed for? The answer was maintenance work, and the company was charging tenants the exact amounts they paid subcontractors with zero markup. As it turns out, the company didn’t see this category as income because they were simply recouping repair and maintenance costs, but for purposes of Code 47052, it is considered part of the business’ gross sales. Therefore, the company’s gross sales were 2.4 million dollars, not $400,000, for the year being audited.
It’s important to note that for insurance purposes and risk assessment, the 2.4 million dollars is considered accurate and will reflect an accurate insurance assessment and accurate premiums.
Now, after getting this assessment and wanting to lower their premiums in the next year, the property management company may consider switching how they pay subcontractors. Instead of asking clients to reimburse them for maintenance and repair costs, they may choose to have the building owners pay the contractors directly or get authorization to pay the contractors directly from the building owner’s bank accounts. This would result in a smaller amount of gross sales for the year. Unfortunately, if an insurance auditor encounters the above scenario and doesn’t contact the underwriter to reassess the maintenance and repair costs, it can result in an inaccurate premium and an insurance policy that doesn’t fully cover the property management company. Therefore, it’s always best to keep extremely good records and be upfront and honest with the assessor on the amount of gross sales.
Getting Business Liability Insurance with Fearnow
If you need business liability insurance for your business, we can help you. Our agents can ask you a few questions about your business, answer your questions and provide you with a policy that meets your needs. Once your policy is up for renewal, we’ll conduct an insurance audit to make sure that your premiums and insurance coverage are accurate.
To learn more about business liability insurance or to get workers compensation insurance, umbrella insurance, or commercial auto insurance, give us a call at 813-689-8878.
