We have all heard the saying, “in this world nothing can be said to be certain, except death and taxes”. For the business owner, there is one more certainty—your annual insurance premium audit.
Some insureds may believe insurance premium audits will be the cause of their death, however, with proper counsel, guidance, and expert advice, Sentinel Risk Advisors will arm you with the knowledge to ensure the best outcome for your annual audit. It is important to understand insurance premium audits – what they are, why they are performed, and how to take control of the process so you don’t get overcharged by the insurance carrier. Experts estimate that 50%-60% of business owners have overpaid on an insurance premium audit at one time or another. You may wonder how this can even happen in this day and age. The simple answer is: People can still make mistakes.
When your policies were first written, the insurance carrier used estimated exposures – revenue, payroll, etc. – to determine an estimated premium. Insurance auditors are employed by the insurance carrier to assess the accurate rating exposures at the end of the policy term and calculate the resulting earned premium accordingly.
A premium audit is a review of a business owner’s records and operations to ensure the accuracy of the rating basis.
Audits are performed on those variable exposures, like payrolls or sales, that can change year to year. Several lines of coverage can be subject to audit: Inland Marine, General Liability, Automobile, Workers’ Compensation and Umbrella/Excess just to name a few. For the sake of this article, let’s dig deeper into a workers’ compensation audit. Workers’ Compensation policies are written at the beginning of the policy term using estimated total renumeration for employees separated by job duties (class code) and state of exposure. At the end of the policy term, usually 30-60 days after the renewal, auditors calculate the total actual remuneration for services performed by employees based on records you present from the policy term.
Remuneration includes money and money substitutes, e.g. bonuses, vacation pay, wages, commissions, payment for piece work, profit sharing plans, value of board and lodging, sick pay, holiday pay, overtime etc. The auditor records actual exposures, compares it to the original estimates provided, and determines a final audit premium. Audits can result in additional premium or a return premium. If an additional premium is calculated, you typically have 30 days to pay. If the additional premium is a substantial amount, many carriers will offer a payment plan of 3 equal payments over a 3-month period.
The premium audit process can be conducted several different ways.
The first way is a mail in audit whereby the carrier sends a form to complete and return with your actual exposures. The second way is a phone audit in which an independent contractor of the insurance company calls the business owner over the phone to complete the audit. These first two ways are usually for smaller business owners. The third, and most common way, is a physical audit in which an employee of the insurance company or an independent contractor hired by the insurance company comes to your place of business to collect the needed information.
All three audits are subject to errors, but it is the physical audit where most mistakes take place. There are over 700 rating classifications utilized in Workers’ Compensation coverage and even more for General Liability. Add the numerous Statutes and state exceptions that govern these classifications and how to apply them, when you can apply them, and even if you can apply them and you begin to understand just how an error can happen.
Another contributing factor is the individual premium auditor’s experience. It takes many years to master all the complications an annual premium audit presents. Your audit is not done by a computer but by a person and as mentioned previously, people make mistakes.
There are several steps you can take to help ensure your premium audits are accurate.
The first and most important step is to make sure you give it the attention and priority it deserves. When the auditor calls for an appointment, work out a mutual time that works for you both. Designate an individual in your company who is familiar with the overall operations and employees and the records needed for the audit to assist the auditor.
It is very important to be well prepared for the audit. Any preliminary work you can do ahead of time will be a huge time saver at the appointment. Consider preparing a spreadsheet categorizing all the employees into the proper class codes per your insurance policy and separating the standard remuneration and overtime in separate columns. Premium audits can involve inspection of accounting records including payroll journals, disbursements journals, general ledgers, Social Security reports, state unemployment forms or other tax reports so ensure you have access to this information when meeting with the auditor.
Another very important step is to ask for a copy of the premium auditor’s worksheet before they leave the audit. Auditors do not offer you a copy as standard practice, however they must provide you a copy if you ask, so make sure you do! Keep in mind, your insurance broker cannot request these worksheets, only you as the policyholder can. This worksheet provides all the details the auditor has collected and will be invaluable should you not agree with the final audit and want to file a dispute. Typically, a dispute must be filed with the insurance company within a matter of days (as few as 10 and often a maximum of 30) of receiving the audit from the insurance company.
Listed below are some of the most common areas where mistakes can take place on a workers’ compensation audit:
- Overtime — In most states, the amount paid in excess of straight time pay can be deducted, if the excess can be verified in your records. You must maintain your records to show overtime pay separately by employee and summarized by classification of work by state.
- Included or Excluded Owners/Officers — If owners and officers have elected to be included in workers compensation, salaries should be capped according to the allowed amount in the correct state, under the proper classification. Remember that differing salary caps are used depending on your legal entity status (i.e. sole proprietor, partnership, corporation, LLC etc.).
- Division of Payroll — In general, one basic classification describes your overall business operations. However, certain classes, known as standard exceptions, may be broken out, such as clerical, sales or drivers. In the construction trade, a breakout of payroll between various trades is permitted. It is the insured’s responsibility to keep payroll records on a time basis and to be sure that the hours in each classification are accurate. Percentages are not allowed. If accurate payroll breakout is not maintained, all payrolls will be assigned to the higher classification.
- OCIP/CCIP’s or Wrap-Ups — Payrolls for Owner Controlled or Contractor Controlled Insurance Programs that the insured is involved with is NOT included in the Worker’s Compensation audit as long as proper payroll records are maintained and can be substantiated for the auditor.
- Subcontractors or 1099’s — Subcontractors or 1099’s without their own insurance coverage are treated as employees in most states. If a subcontractor is insured, obtain a copy of the insurance certificate, and keep the certificate on file for the auditor to review. Without it, they will add their payrolls to your audit as if they were uninsured.
- Multi-State Operations — It is important to keep the payrolls separate by state since every state has different rates for the same class codes. Also, multiple states mean differing NCCI or State Bureau rules and state exceptions.
- Temporary Travel/Work in Other States – Depending on the state and the length of time worked in that state (consecutive days worked) will determine which state’s rates apply for the audit. For most states, not all, if taking a work crew from your home state for a short period (i.e. less than 90 consecutive days), you can keep that payroll in your home state rating. Florida, as an example, is one state you must have added to your worker’s compensation policy to enter the Sunshine State, regardless of the number of days you plan to work there.
An often-overlooked step in helping you control your audit outcome is to partner with an insurance broker who is educated in all the regulations and state rules that affect your audit.
Your broker should be able to read and interpret the premium auditor’s worksheet to see if any errors are present. Your broker should also be able to file the dispute and then help resolve that dispute quickly and professionally with the insurance company. It is always a good idea to include your insurance broker at the actual audit to counter any tricky questions that may come up or just for the comfort of an insurance professional on your side. Remember to inform them of the meeting when it is set, as they do not get notified by the insurance company directly.
Lastly, if there is a significant increase in risk exposures for the previous term, your current policy may be endorsed to reflect the values calculated at audit and an additional premium for the current term may also be due to the carrier.
Many times we are asked by insureds if they have to cooperate/comply with the audit request. The audit is a policy provision as outlined within your policy and thus a contractual obligation you agreed to when you originally purchased your policy. If you don’t comply an insurance company is allowed to use estimated audit figures (sometimes two to three times the estimated payrolls offered at the inception of the policy) so beware.
Preparing for an audit can be a daunting task. Spending a bit of time preparing prior to the auditor’s visit and partnering with an expert like Sentinel Risk Advisors, LLC will help ensure you aren’t part of the 50%-60% of business owners that are overcharged.