The term audit is often misunderstood and sometimes feared when a business owner receives the notification that their insurance policy is being audited. Never fear, your trusty insurance advisor is here to help you through this sometimes confusing, and often irritating audit process. There are two main types of policies that can be audited. They are the worker’s comp policy and a liability policy.
Worker’s Comp Policy Audit
The worker’s comp audit is a reconciliation of your payroll estimate that was reported to your carrier at the beginning of your worker’s comp policy term and comparing it to the actual amount that was paid to your employee. These amounts are broken down by the employee’s classification code, as determined by the class guide of your worker’s comp board by state. Each class code has a different rate, and each class has a specific scope of work that is entailed in the class code description. There are several codes that are similar and include comparable work functions across industries--so it is imperative to talk to your agent about the duties of each of your employees. Putting an employee’s payroll into the wrong class code will skew the audit; and when reconciled it can either go in your favor with a lower rate or go against you with the payroll being applied to a class with a higher rate.
How an Audit Process Works
A worker’s comp auditor may contact you through various channels including by mail, phone, or electronic submissions, which are the most popular, although paper audits are still done when necessary. An auditor will typically ask you to provide your:
- Federal 941 tax forms
- A detailed payroll report of the dates included in the policy period,
- A general ledger of expenses or profit and loss statement
- Certificates of insurance from any sub-contractors that were used during the year
It is important that you provide this information in a timely manner and cooperate with the auditor during this process. This is a requirement set out within your policy.
Be aware that in NY State, all sub-contractors who do work for you should have their own worker’s compensation coverage in place. If they do not have worker’s comp insurance, the audit will consider that person on your payroll with regard to worker’s compensation in whatever class they best fit. So anytime your business needs a plumber, electrician, or roofer, make sure they have worker’s comp or call your agent for a rate to include it in your bid for work as an expense. The general ledger is requested to ferret out these independent/sub-contractors in your books; so stay ahead of the game, and request proof of coverage before they start the job, or certainly before they get paid.
A pay-as-you-go payment platform is a great way to mitigate the difference of your estimated versus actual premiums on a worker’s comp policy. This payment platform allows you to report your payroll in real time and the premiums are pulled out of your payroll account shortly after you’ve reported to the worker’s comp carrier. SimcoHR has access to several carriers that have the ability to offer this payment option. As a bonus, when you also have your payroll done by SimcoHR, the payroll reporting and the audit process is smooth and much less stressful because we already have copies of most of what you need! Call SimcoHR today and talk to us about whether this option is right for your business and how we can help you navigate the world of worker’s comp audits.
Liability Policy Audit
The second type of audit business owners may encounter is the liability audit. Liability is rated differently dependent on the type of business. A manufacturer or a retailer are rated based on gross sales. A contractor will be rated on payroll, and some risks are rated based on square footage or the number of units in the case of habitational risks or lessor’s (or commercial landlord’s) risk buildings. Whether the rating is based on sales or payroll, the amount that you report when the policy is taken out is what your liability premiums will reflect. If you’re a food establishment, the sales may be broken out between food sales and liquor sales. If you’re a contractor, an owner is considered on the payroll at a pre-set amount and all of the employee payroll should be included in that figure as well. You may notice that these figures are further broken out in the liability rate between two main liability coverages. A different rate usually applies to your premises and operations section of your policy (what you do and where you do it) and products and completed operations section (what you make). When the two rates are combined you can calculate the premium amount for your general liability coverage.
If your audit results in an additional premium, that amount will be billed to you by the carrier or the agent to be paid. In addition, you may see an endorsement to your renewal policy amending the rating basis for the renewal term to match the prior term. Fair warning, if your agent chose the incorrect class code for your business operations, an auditor is within their rights to make the change to your class and charge the appropriate rate for that class on the policy term in question along with the renewal.
The insurance professionals here at SimcoHR are here to help you get it done right and assist you through the audit process to make it as painless as possible, so if you have any questions or would like a free assessment whether your commercial insurance is with us or not, give us a call.
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