Answering questions about an insurance audit
By Martha Marton

Typically, most commercial insurance premiums are based upon a percentage of estimated sales and/or payroll for the policy year. An audit is done to determine what the actual premium should be, based on the actual sales and payroll for the policy year. Types of insurance policies subject to audit include: General Liability, Workers' Compensation, Garage Liability and Package policies.

An audit can be done by telephone, by mail or in person. Soon after your policy expires, you will be asked to provide updated sales and payroll figures by phone or by mail. Sometimes a field auditor will come out to your place of business to actually review your sales/payroll bookkeeping records. In the case of most small policies, the audit information is almost always requested by phone or mail. The information is used to calculate the actual premium for that policy year. If your estimates were much lower than the actual premium, you may find yourself owing an additional premium. If your sales were much lower than expected, you may have a refund of premium.

Providing low figures to your insurance broker may net you a low premium during the year, but you may find yourself owing a large lump sum at the end of the year when the audit is due. While not all discrepancies can be planned, (a really great or off year can happen to anyone), it is probably better for most companies to finance the premium throughout the year rather than have to pay a large unexpected amount at the end of the policy year. The audit amount is usually due immediately and most of the time not financed by the insurance company. Contractors also may be required to provide certificates of insurance for subcontractors. Without proof of insurance, they could be considered your employee, resulting in increased premium charges.

The standard general liability policy provides coverage for vicarious liability from the actions of others. The subcontractor's general liability insurance carrier would probably respond to the action, but additional exposure is created by the presence of the subcontractor on the job. So even though a certificate is provided an additional charge may be incurred. The rate on the hiring contractor's general liability will be much lower since they are providing excess coverage.

I am often asked if disclosing this information is absolutely necessary. It is part of your insurance contract, standard industry practice and the information is held in the strictest confidence.