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Business owners, just because last year’s insurance policy is expired and paid for, another bill may still be owed for it. This is normal for auditable insurance policies which are billed weeks after a policy is over and a renewed policy is in effect. General liability and work comp audits are the most common as those policies work on an audit basis.
The cost of workers compensation is based on payroll and general liability can be based on multiple factors such as sales, payroll, building size, and even flat charges. Audits are necessary for both these policy types because these factors vary from year-to-year. The more sales or payroll, the more risk the insurance company shoulders, therefore the higher the cost of the policy. This makes each business’s insurance costs proportional to their size.
The General Liability/Work Comp Audit Cycle
An auditable policy begins based upon an estimate of sales/payroll/other factor and everyone settles up at the end. Soon after the policy is over, the insurance company requests actual figures for the time the policy was in effect and issues a bill or refund check as appropriate. The audit request may come by letter, email, phone call, or an on-site visit. Auditors often request accounting records as backup for the information supplied. Tax returns may be requested as well. Auditors may also inspect business operations or works areas. Complying with these requests is essential to remain in good standing, even if you no longer carry the coverage or if you moved the policy to a different insurance company.
How to Prepare
Track Sales and Payroll by Classification
Businesses should prepare for audits by keeping detailed and accurate accounting records throughout the year. This means tracking sales, payroll, and other expenses by policy classification. For example, one client is a contractor that periodically performs roofing jobs and their workers compensation policy includes classifications for roofing, masonry, painting, interior carpentry, and others. For workers compensation, roofing is much riskier than interior carpentry and therefore insurance for that classification costs more. Our client records payroll for roofing jobs separately, ensuring they are not overcharged for insurance. If payroll is not tracked by classification in the accounting system, the auditor is required to charge everything against the highest cost policy classification. The same principal applies for sales and other expenses with general liability.
Work comp audits are based upon gross payroll including wages, salaries, commissions, bonuses, holiday pay…just about everything. Severance pay is not included. Ask your auditor any questions regarding what should be included in payroll reports.
Breakout Labor and Materials
Recording expenses by labor and materials is imperative not only within your own accounting records, but from subcontractor invoices. Require subcontractors to break out all invoices by labor and materials and track them in your accounting system as such. In this manner, where appropriate, only labor costs will be charged against your policy. If not broken out, all subcontractor expenses will be charged as labor which will increase the audit.
Obtain Certificates of Insurance from Subcontractors Before Work Begins
Subcontractors affect both general liability and work comp audits, and are a common source of misunderstanding. If a subcontractor does not maintain their own workers compensation policy, their payroll will be charged against your work comp audit since they performed the work on your behalf. For general liability, work performed by uninsured subcontractors is also charged against your policy, often with a surcharge. In either case, if the subcontractor provides a certificate of insurance before they begin work, your business will not be penalized.
In Summary
Track sales, payroll, and subcontractor labor costs by policy classification.
Require certificates of insurance from subcontractors before they begin work. If uninsured, expect them to be charged against your policy.
Breakout expenses between labor and materials.
Require subcontractor invoices be broken out by labor and materials.
Disputing General Liability/Work Comp Audit Findings
Businesses may dispute general liability or work comp audits. The issue may be a charge against the wrong policy classification or the auditor may have misunderstood reports provided. In most states, workers’ compensation policies are governed by the National Council on Compensation Insurance (NCCI) and policy forms include explanation of audit obligations. The audit notice will include instructions on how to initiate a dispute.
A Growing Business Means Future Audit Billings
If sales or payroll increase, set aside money for the upcoming general liability or work comp audit. Too often, when a business experiences high growth, they are caught off guard by three subsequent billings. The timeline flows like this: 1) the business pays for the renewal policy, 2) soon thereafter the business is billed for the audit on the expired policy, then 3) the insurance company automatically increases sales/payroll estimates for the existing policy to match the audit, resulting in a third bill.
Non-Auditable Policies
Not all general liability and workers compensation policies use an audit cycle.
Pay-As-You-Go
Certain policies can be paid based on current sales/payrolls. This is done by the business reporting sales/payroll to the insurance company on a regular basis and the insurance company then charging accordingly. To streamline, this process may be set up through payroll providers or accounting software. Pay-as-you-go policies do not remove audits completely, but greatly simplify the process.
Non-Auditable General Liability
Certain general liability policies are non-auditable, meaning the insurance company and client agree ahead of time what the cost of the policy will be. In this manner, the expense will not fluctuate whether sales grow or decline. Ask your insurance agent if such a policy may be appropriate for your business.