How Contractors Avoid Overpaying for Insurance at Premium Audits

By: Don Bury
Contractors find they must endure audits from insurance companies every year. The more prepared you are, the less likely you will be overcharged.

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.

The audit is performed by an auditor selected by the insurance company. 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.

If an auditor questions the use of any classifications, they may ask to see some actual work being done by your employees.

It is important to understand credits you are entitled to in 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.

If premiums are payroll based, you will pay for total remuneration as defined in the policy.

Remuneration in most states, means money or substitutes for money, and includes:

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

Understand the following concepts and definitions to help make sure you avoid overpaying from an audit.

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. Excess pay for overtime must be clearly segregated in the payroll records.

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. When payroll is divisible, daily time card must be kept allocating the work to different classifications. If not, wall wages will be charged against the highest rated classification to which the employee is exposed.

Avoid becoming responsible for injuries to employees of subcontractor, by obtaining certificates of insurance naming you additional insured. Check your contracts with your subcontractors to make sure you are held harmless and properly protected by indemnification clauses. 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.

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.

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

» More on Insurance