The Role of the Audit in Insurance

The mere thought of an audit is enough to strike fear in the minds of most people. However, it does not have to be thought of in this way since an audit is nothing more than the reconciliation of estimates versus produced results as it relates to insurance. In general, commercial insurance premiums are based on gross estimated annual payroll, revenues and/or subcontractor costs. Knowing the role of the audit in relationship to preparing for it can make the process smooth and easy.

All it takes is a little organization and planning.

When underwriting new or renewal lines of commercial insurance, the key questions that affect the premium are what does the applicant estimate as their gross annual sales, or what are the expected employee/payroll costs along with a breakdown of the job descriptions of each person employed? If subcontractors are used, what is the amount of money paid for their services and are certificates of insurance kept on file? The reason these questions are asked is to determine the level of risk. The higher the numbers, the more potential there is for loss. In other words, the more business you do equates to a greater chance that a claim may be made against you.

Premiums are typically minimum and deposit, as it relates to liability, and not so as it relates to workers’ compensation. What this means is, with respect to liability if revenues or payrolls are overstated no premium is returned upon audit whereas for workers’ compensation, it is. Strategically speaking it is wise to conservatively estimate sales, payroll and sub costs when it comes to liability and estimate as accurately as possible potential payrolls for workers’ compensation.

Preparing for an audit includes but is not limited to the production of a profit and loss statement for the policy period in question as well as putting together a payroll summary by employee name along with the quarterly RT-6 and 941 forms correlating to the coverage period. If subcontractors are used, then the certificates of insurance evidencing liability insurance and/or workers’ compensation coverage with equal or greater limits than your own as well as additional insured status being evidenced is a must. The rate charged for subcontractors is significantly less than that of employees as it relates to liability insurance. When it comes to workers’ compensation coverage, if the subcontractor does not provide a certificate of workers’ compensation coverage, then the amount paid to the subcontractor may be construed as payroll serving to increase the workers’ compensation premium.

In summary, an audit is meant to verify estimates versus actual results.

Maintaining records such as RT-6 and 941 forms, along with certificates of insurance can make life easy when it comes to dealing with an audit. Use of a payroll processor such as ADP or Paychex can make the production of these documents along with a payroll summary as easy as the touch of a button. Keeping good records is the key to avoiding anxiety and usually provides for a predictable outcome. Please do not hesitate to call us when it is time for your audit, as it will be our pleasure to provide specific information to help you through the event.