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Prepping for an insurance audit

By:
  • SIMA
- Posted: October 1, 2015

By Shay Leon

An insurance audit is the insurance company’s way of looking back on the prior year’s exposure and adjusting accordingly based on the information the snow and ice management company provides. Insurance companies audit every year since policies are based on estimated numbers to determine exposure and premium. They are not good or bad; they are just a function of the system.

Workers’ compensation, general liability and commercial auto policies are most commonly audited. Typically they are looking for the following information:

  • Prior year’s payroll (based on each employee’s classification)
  • Prior year’s sales (based on products sold or work performed)
  • Cost of any subcontractors used
  • Change in business exposure based on current classification
  • Vehicles added or deleted during the past year (composite rated auto policy).

This article will focus on payroll/sales-based policies like workers’ compensation and general liability since this is where most discrepancies occur. Following are a few suggestions that can make the audit go smoothly and help avoid misclassifications that can cost you money and time. 

Understand classifications. For workers’ compensation, understand each classification on the policy and the exposure base - payroll. There can be subtle differences in job descriptions that can move an employee’s payroll from one classification to another. Ask your agent for classification definitions if you have any concerns.

Be consistent. Use the same descriptions and codes in your payroll report as the policy uses. For example: John Smith, Landscaper, code 0042; Jim Brown, Sales, code 8742, etc. Avoid using generic terms like laborer, foreman, supervisor, etc.

Match job descriptions. Make sure all job descriptions match employee job descriptions, which should match the assigned classification. For general liability, make sure all listed classifications coincide with your company’s operations. If your company is providing a service not listed on the policy, discuss this with your agent prior to the audit.

Keep proof of insurance. If you used subcontractors, make sure you have their certificates of insurance on file, which provides proof of workers’ compensation and liability coverage for the year you are being audited. It’s a good idea to have your agent review the certificates. If you do not have certificates, be prepared to be charged based on the type of work subbed and the total cost.

Organize all reports. Make sure you have your reports ready in a clear,  organized manner. The easier you make it for the auditor, the less chance of an error.

Be concise
. Don’t get wordy when an auditor asks you questions. Short, precise answers leave little room for interpretation. Treat this as if you were talking to a tax auditor; the less said the better.

Know your auditor. Ask the auditor if he is an employee of the insurance company or a third-party auditing company hired by your provider. Insurance company auditors typically work with you and do a more professional job; treat them well. Third-party auditing companies are a toss-up. Be extra diligent with them. 

Pre-emptive strike
It’s important to do a pre-audit with your insurance agent well before you schedule the company audit. Your insurance professional should review all prior-year policies noting classifications, payroll/sales reports, subcontractor costs and certificates for the past year. Your agent should advise you on any discrepancies and give you a general estimate on any increases or decreases based on the information you provide. Making sure your audit is done properly not only can save you money but also identify potential coverage issues in your insurance program.

Insights

  • A pre-audit with your insurance agent can identify trouble spots.
  • Pay particular attention to records for subcontractors. These relationships are a prime target for audits.
  • Commercial auto policies are also frequently audited. Make sure your policy covers the services you provide.
  • Be organized and concise to ensure a smoother audit process.

Shay Leon, AAI, CIC, is area vice president of commercial lines for Bollinger Inc. He also is a member of the Stakeholder Advisory Group for SIMA. Contact him at Shay_Leon@ajg.com.

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