Insurance Premium Audits for Contractors - How To Avoid Getting Overcharged In An Audit
WHAT DO CONTRACTORS NEED TO KNOW ABOUT PREMIUM AUDITS? Most contractors find they are subject to premium audits from insurance companies for general liability, workers compensation, and sometimes for automobile, and even builders risk insurance policies. This applies most types of contractors, including general contractors, plumbing contractors, heating ventilation and air conditioning (HVAC) contractors, electrical contractors drywall contractors, painting contractors, roofing contractors, and so on.
A premium audit is a review of your business operations, financial reports, and records to determine what to charge you for your contractor liability insurance, workers compensation, or other coverage provided. The objective is to determine the final earned premium for a given policy that was issued on the basis of payroll, sales, subcontracting costs, or other variables.
When policies are issued, the premium is often based on projections you provide for sales or payroll. Your insurance rates can vary based on this information, the audit determines what the correct premium should be based on your actual experience.
An auditor selected by the insurance company conducts the audit. They may be an employee of the insurance company, or an employee of an auditing firm, or even an independent contractor.
THERE ARE THREE TYPES OF PREMIUM AUDITS. Depending on the size of your premiums and your operations you may get one of the following:
Physical Audit — Conducted at your premises or at a secondary location such as your accountant’s office.
Phone Audit — An auditor contacts you over the phone to complete the audit. This type of audit is generally for small- to mid-sized accounts.
Mail Audit — A voluntary audit form with instructions is mailed to you. Mail audits are generally conducted for smaller accounts.
RECORDS AUDITORS MAY ASK TO SEE: Auditors are likely to ask for one or more of the following types of records:
Journals and Ledgers
Tax filings Individual
Pay Records
Time cards
Vehicle titles
Contracts with clients
Contracts with subcontractors
Records of Job Costs
P&L Statements
Balance Sheets
QUESTIONS AUDITORS MAY ASK The auditor will likely ask questions about your records or operations. They may be asking questions to determine if the correct classifications are being applied. If an auditor decides your operations are not correctly classified, it can have an unwelcome surprising result of a large audit billing. Make sure you understand your classifications, and how the boundaries of your particular classifications are defined.
An auditor may ask for a tour of your operations, if they feel it may be necessary to verify correct classifications are being used.
Be familiar with how credits can be applied to your audits.
Insurance classification and rating rules often allow credits to your audit, but your records must be maintained to provide the necessary information in detail and summary form.
When premiums are based on payroll, it is generally defined as Total Remuneration for services performed by an employee.
Remuneration in most states, means money or substitutes for money, and includes:
Bonuses
Commissions
Holiday Pay
Other Money Substitutes
Overtime Pay
Payments made to Profit Sharing Plans
Payments made to statutory benefit plans
The value of board and lodging
Tool Allowances
Wages
Understand the following concepts and definitions to help make sure you avoid overpaying from an audit.
OVERTIME
In most states, the amount attributable to overtime in excess of the regular time pay rate may be deducted. It must be clearly identified in your records. It must be shown separately by employee and in summary by class of work.
DIVISION OF PAYROLL
Division of an individual employee’s payroll to more than one classification is not allowed, except for construction or erection operations and/or certain executive officer classifications. For construction or erection operations, the payroll of an employee may be allocated to each type of work performed on daily time cards. If not, wall wages will be charged against the highest rated classification to which the employee is exposed.
SUB-CONTRACTORS
Avoid becoming responsible for injuries to employees of subcontractor, by obtaining certificates of insurance naming you additional insured. Also, include in your subcontract agreements hold harmless and indemnification agreements in your favor. Auditors look to see if you have adhered to the terms in your policy as respects to your subcontractors. Sometimes audits go bad when the certificates are not in place, or the auditor decides payments to subcontractors are really wages to employees.
AUTOMATED RECORDS
Set up your automated records to provide audiors what they need, and you will find your audits go smoothly, and save you lots of time in the future.
DOCUMENTS YOU MAY BE ASKED FOR AT AN AUDIT
Accounts payable journal and cash dispersements
A/R journal
All vehicle leases, including but not limited to, owner-operator leases
Annual income tax statements
Documents supporting entries in the journals and financial statements
Driver and vehicle logs
Expense journal
Income Statements
Monthly Individual earnings reports
Payroll records including the payroll journal
Quarterly 941’s
Registrations for owned vehicles
SUI’s (State Unemployment Reports - DE 6’s in California)
General and subsidiary sales ledgers
All underlying journals
Don Bury is a nationally recognized expert on negotiating with commercial insurance brokers. Author of “Buyers Guide To Business Insurance” in 1993, over $20 million in cost reductions have been delivered so far. Contractors get free help at http://www.contractorinsurancetoohigh.com Don Bury, President Insurance Cost Reduction Services 3663 Camino Bella Rosa Sierra Vista, AZ 85650 Phone/Fax: 800-760-1867 email: donbury@icrs.biz