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What Is an Insurance Audit?

Audit can be a scary word. Most people get very anxious when they hear it.  They associate it with the IRS and their own income taxes.  But insurance audits don't have to be intimidating and can even results in refunds or credits going forward.

 Insurance audits are common with commercial insurance and business owners just need to understand the need for them and be prepared.  Some components of the premium of an annual insurance policy are fixed and others are estimated for the year and then "trued up" by an audit of the actual rating basis.

 Workers Compensation and General liability are the most common policies that are subject to audit, however garage and umbrella policies may be subject to review as well.  What is important to understand is that the rates the insurance carrier charges will not and cannot change during the policy term.  The only factors that can change is the volume or rating basis that reflect how the business performed during the policy year.  With Workers Compensation, payrolls are estimated at the beginning of policy term.  At the end of the term actual payroll will be compared to what was estimated via the audit, and is adjusted accordingly.  This may well result in additional premium being due, but could just as easily result in a credit if payroll reflects lower amounts than the original estimates.

 Much the same is true regarding General liability.  The rating basis is commonly gross sales or payroll, but could also include factors such as sub contractor volume.  Again, after the policy term is over an audit will reconcile estimated versus actual and either result in a credit or possibly additional premium being due.

 It is important to understand this at the beginning of the policy and also very important to review with your agent during the policy year - especially if your business is experiencing large fluctuations in volume of sales and payroll.  There is no sense over paying premium to an insurance carrier and waiting for a credit if volume is down.  Likewise, no one likes surprises and an audit can result in a large premium due if volumes are increasing.  These factors can be offset if you and your agent are reviewing actual versus estimated volumes during the policy term and amending the policy accordingly.

 Sometimes an audit will be performed over the phone or via mail.  This is most typical for small to medium sized business.  A face to face will most likely be the case for first time and larger accounts on an annual basis.

 Good record keeping and good communication with your agent are key to making the process smooth and anxiety free. Your friends in the insurance business are here to help you navigate through this!