The Essential Guide to Navigating Insurance Audits: What Every Business Needs to Know

Insurance audits are a crucial aspect of managing workers’ compensation and liability policies for any business. These audits ensure that the premiums paid by businesses accurately reflect their operational risks during the policy period. This guide will delve into the process of insurance audits for workers’ compensation, general liability, and liquor liability, emphasizing the importance of diligent completion to avoid adverse outcomes like penalty fees, estimated audits, and policy non-renewal.

Understanding Insurance Audits for Workers’ Compensation and Liability

Workers’ Compensation Policy Rating

Your workers’ compensation policy is primarily rated based on the estimated annual payrolls of your business. At the end of the policy period, insurance companies are mandated to conduct audits to verify these payroll estimates against actual figures. The process involves scheduling an audit with the insured party, during which documentation such as payroll reports, quarterly UC2 forms, an employee list detailing their duties, and other pertinent records will be requested.

Dealing with Subcontractors and 1099 Employees

The audit also extends to inquiries about any subcontractors or 1099 employees your business might employ. Should you engage subcontractors, the amounts paid to them will be included in your audited payroll totals unless proof of their workers’ compensation coverage, through a certificate of insurance, is provided. For enhanced protection, it’s advisable for businesses to have subcontractors name them as an additional insured on their policies and to secure a signed subcontractor agreement.

General Liability and Liquor Liability Audits

Beyond workers’ compensation, general liability (based on payroll or sales), liquor liability (based on sales), and other policies can also undergo audits. Not all general liability policy are auditable, so check with your agent. These audits are designed to assess the level of risk the insurer undertakes by covering your business, adjusting your premiums based on your actual business activities and sales figures. Accurately reporting your sales and payroll helps ensure that your coverage meets your business needs without overpayment.

The Consequences of Not Completing Your Audit

Failing to complete an insurance audit can lead to several negative outcomes for businesses:

  • Penalty Fees: Insurers may impose penalties on businesses that do not comply with the audit process.
  • Large Estimated Audits: If actual data is not provided, insurers might use estimates to determine your premium, which could significantly differ from what your actual premium should be, often at a higher rate.
  • Policy Non-Renewal: Failure to comply with audit requests can lead to an insurer deciding not to renew your policy, leaving your business without coverage. New carriers may not want to write your insurance if your policy has been non-renewed.

Navigating the Audit Process

To manage potential fluctuations in premium payments resulting from an audit, businesses can adjust their reported payroll during the policy period. This proactive approach can help spread out any necessary payments and reduce the audit amount, potentially leading to a smoother audit process and financial predictability. Respond quickly when you are contacted by the audit to insure that the audit is completed in a timely fashion. You can click this link for additional information from the PA Department of Labor & Industry.

Conclusion

Insurance audits are a vital part of maintaining accurate and fair insurance coverage for your business. By understanding the audit process and the importance of providing accurate information for workers’ compensation, general liability, and liquor liability policies, businesses can avoid unnecessary penalties and ensure that they are adequately covered without overpaying. Regular communication with your insurer and timely adjustments to payroll or sales reporting can help manage the audit process effectively, keeping your business on solid ground. If you would like more information or help managing your insurance, please contact us.

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