February 13, 2020

Insurance Audits are a Pain Point for Businesses: What You Need to Know

Guest Blogger: Virginia (Gin) Kinneman, Agency Owner of Kinneman Insurance

Business insurance policies are written on the basic assumptions of an estimate of the coverages needed to ensure that the business’ risks are covered.  Insurance companies have the option to audit a company to be sure they are insuring the business correctly for the right price; this option is built into all business policies. Unfortunately, Insurance audits are often one of the biggest points of pain for business owners.

If a policy is being audited, the business will be notified by mail or email. The audit itself can be completed in multiple ways; it can be done by phone, filling out at form online, or by a visit from an auditor. The audit usually happens about thirty days after a policy expires.

Even if the policy is canceled, the business is obligated by contract to still complete the audit. If an audit is not completed, the insurance company may increase the renewal premium (?) or payroll insurance costs based on their experience, or even cancel the policy outright.  If a business fails to complete the audit– even if that company opts not to renew a policy– the insurance company will notify the state of any noncompliance.  This may cause any future policies to be cancelled regardless of insurance carrier, and the state may impose fines too.

Something to keep in mind when preparing for an audit is that the policy was written with certain class codes, which will be found on the declaration page. The auditor will be looking to see how the business performed within those codes. Sometimes an auditor will find that a business is doing work outside of the codes– this may cause an adjustment.  Other adjustments may occur if payroll or sales are different than reported. Seldom does an audit come back exactly as written or renewed. Keep in mind that auditors do make mistakes, and an audit may be appealed.  In fact, many insurance audits are appealed.

When the audit is being performed, auditors look carefully for subcontractor use. It would be smart for a business to obtain proof of insurance from all subcontractors ahead of time to avoid paying an extra insurance expenses. There may still be an increase in cost of insurance for subcontractors, but it will be lower if the business has a certificate of insurance to prove coverage.

The best advice to reduce the pain of these audits is to keep clear payroll records that demonstrate what employees do. The insurance agent who wrote the policy will be a good resource to clarify any issues brought about by the audit.  Think of the insurance agent as your partner in the process.

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