A Commercial Insurance premium is based on the how much activity a business has; the more activity, the more exposure to loss and the higher the premium. At the beginning of the policy term, the exposure (payroll, gross income, admission, gallons, etc.) is estimated. At the end of the policy term the insurance company conducts an audit to determine the actual exposure. Audits ensure that your insurance premium is based on your individual level of activity.
The three most common measures of exposure are:
- Gross Payroll – Includes wages or salary, commission, bonuses, overtime, holiday, sick and vacation pay as well as the value of housing if provided for employees. Overtime is adjusted back to straight time if records total overtime paid by job type / rating class code. Tips are deducted from payroll as are dismissal or severance pay.
- Gross Sales – Includes income for all goods and services provided. Deductions include Sales Tax, the value of merchandise returned and freight charges - if freight is a separate item on your customer invoices.
- Subcontract Labor Cost – Total cost of all labor, materials and equipment furnished and used to produce your product or service.
Tips for preparing for your audit:
- Have the auditor send you a list of all information required for the audit.
- Prepare records to take advantage of allowable deductions.
- If you hire subcontractors have Certificates of Insurance for each subcontractor with policy term dates that cover your entire policy term – you may need at least two Certificates on each subcontractor.
- Restaurants and retail stores should always report gross sales of food and alcohol separately.
- Lottery Sales – only commission is included.
Tips for the audit appointment:
- If you prefer an exact appointment time and not an appointment “window of time” ask for the first appointment of the day. Being the first appointment means you won’t be kept waiting because the audit before you took longer than expected.
- Provide the auditor with an area to work with enough space for your records and a laptop computer. Providing a good work area reduces the time it takes to conduct the audit and reduces the risk of errors.
- Auditors may ask questions that don’t appear to be relevant such as gross income on an audit based on payroll. Insurance companies use gross income to judge if the payroll is credible, so even though the policy is rated on payroll, they may ask for gross income.
- If the auditor asks you to sign an authorization to release the audit worksheets to your agent sign the form, it will expedite the process if you dispute the audit.
- Finally, auditors are paid to audit-not try to audit; their income is based on the number of audits they conduct. Time spent by an auditor making multiple calls to schedule the audit or waiting for records during the audit takes time which the auditor could use to identify and apply credits you’re due to reduce your premium. The same auditor may conduct your audit year after year, and building a good relationship with an auditor could save you money!