November 16, 2015 | By Kelly Mansfield |
Just hearing the word “audit” can cause some to cringe, but preparing for an insurance audit ahead of time can help to make the process much smoother and less stressful.
The purpose of an insurance audit is to verify payroll or revenue to confirm that the insurance policy is rated appropriately. When a policy is written, estimates for payroll and/or revenue are used to determine the annual premium. Many general liability policies and all workers’ compensation policies are audited. Other types of insurance policies can also be auditable, including excess liability policies and contractors’ equipment policies.
Here are 5 steps that you can take ahead of time to simplify your insurance audits:
1. Use clear bookkeeping processes and maintain accurate adn detailed records. Some of the records that an auditor might ask for include payroll journals, federal tax reports, and individual earnings records. Payroll journals should reveal monthly totals along with a breakdown of work performed by employees. Individual earnings records should include the type of work performed, the hiring date and the termination date.
2. Clarify classification codes used for rating. Policies are rated by classification codes, so it is essential to use correct classification codes. Rates can vary greatly by classification. For example, the rates for a clerical worker or salesperson are much lower than the rates for a carpenter. If an employee has more than one job duty, you may be able to use two classification codes depending on the state where you are located, however you must keep clear records on the hours devoted to each classification and the classification codes must be approved by the insurance company prior to starting the policy.
3. Understand how payroll is calculated. Generally, the payroll used for the audit is the total remuneration paid to an employee. There are some exclusions, so check with your agent, your state workers’ compensation agency or your insurance company to determine possible exclusions in your state. One example is overtime. You may be able to deduct pay that exceeds straight time for hours worked by an employee.
4. Notify your agent and insurance company of changes to your payroll. If your payroll changes during the policy term, talk with your agent to determine whether the policy should be endorsed to avoid unexpected premiums at the end of the policy term.
5. Verify coverage for sub-contractors. If you are using sub-contractors, collect a copy of their general liability and workers’ compensation policies prior to hiring them so that they are not included as employees in the audit.
In short, accurate records will help you to prepare for and simplify the insurance audit process and help you to avoid costly audit bills. By following the tips above, you will be well-prepared for your next audit.
If you would like to learn more, visit us at PioneerBusinessInsurance.com, or call us at 888-596-7242. At the Pioneer Business Insurance Agency we work hard at being accessible, helpful, and result-oriented. How can we put our expertise to work for you?