Business Insurance Audits and COVID-19

May 6, 2020
payroll is a keep component of a business insurance audit

They happen every year: business insurance audits. COVID-19 makes this year’s process a little more complicated… and potentially confusing. If you’re wondering how different payroll and operational changes could affect your audit, the following FAQs may help.

During the pandemic, we’ve included COVID-related audit questions up top. More general FAQs about annual business insurance audits can be found below.

COVID-RELATED INSURANCE AUDIT QUESTIONS

My business had to lay off or furlough workers due to the crisis. How will this affect my audit?

We’re sorry to hear you’re making these tough decisions. Plan to report the total gross payroll for your policy period, at the time of the audit. If the audited payroll is less than the estimates on your policy (because of layoffs), the final audit may result in a reduction in earned premium.

Different states have different rules pertaining to furloughed employees. If you have employees who’ve been furloughed (still getting paid, but not performing work), or received a temporary change in job duties, you should maintain accurate, verifiable payroll records to highlight these changes. (Do not plan to submit adjusted estimates or payroll percentages to your auditor.) Examples of temporary changes in job duties:

  • Field employees temporarily working from home
  • Field employees temporarily performing clerical/office/yard duties
  • Employees now performing delivery services (for example: a restaurant server or hostess now delivering food)

We are unable to access business records at this time because our office/accountant/payroll administrator is unavailable, due to the pandemic. Can we get an extension?

In most cases, yes. Several of our carriers have expressed a willingness to be flexible right now. This includes flexibility for the completion of final audits, non-compliance notices, and final premium audit payments. If you have any concerns about your audit timeline, or already know you will need extra time and assistance, please don’t hesitate to contact our team: 508.339.2951.

We have changed our operations in order to help manufacture PPE (personal protective equipment), hand sanitizer, etc. How will this affect our audit?

If you’ve changed any aspect of your operations, please contact your business insurance agent right away. It’s important to discuss how these changes impact your overall coverage needs.

BUSINESS INSURANCE AUDIT QUESTIONS (GENERAL)

Are all business policies audit-able?

No, not all business insurance policies are audit-able. Primarily, audits affect general liability, workers’ compensation, and sometimes commercial auto policies.

Why does the insurance company audit my business?

As you probably know, your business insurance premium starts out as an estimate. It’s not a final number. At the beginning of the policy term, you and your agent use last year’s sales and payroll data (among other things) to give the insurance company a picture of your annual projected business activity—and your risk profile.

This data represents your premium basis. The insurance company, for its part, takes your premium basis and gives you a non-finalized cost for insurance…

At the end of the year, your insurance company is checking to see if your premium basis was accurate. Changes that occur during the year could heighten or lower your exposures. If you’re currently employing more people, changing or broadening your scope of services, working with more subcontractors, etc., your original estimate is no longer an accurate picture of your risk profile.

This is why insurance companies audit.

Will my business insurance be audited every year?

Yep, ‘fraid so. (Unless you purchase a “pay-as-you-go” plan… More on this option below.)

Typically, your insurance carrier will send an audit request 30-60 days after the expiration of your policy term. Sometimes longer.

What is a pay-as-you-go business insurance plan?

When it comes to workers’ compensation coverage, some carriers offer a pay-as-you-go workers comp option. Among other potential benefits, this model eliminates the need for annual audits. Your monthly premium payment is based off the actual payroll that you or your payroll provider reports during your normal payroll cycle, leaving no room for inaccuracies.

Coverage remains the same as any non “pay-as-you-go” policy, but as the name suggests, payment is withdrawn monthly. Some business owners love this setup. Others like having more control of their premium payments.  If you’re curious, call us to learn more about available pay-as-you-go workers’ comp options: 508.339.2951.

What does a business insurance audit look like?

That depends on the type of audit you’re assigned. Generally speaking, annual insurance audits can happen by mail, phone, online or in person.

If your company is on the smaller side and you haven’t had any issues in the past, you’ll probably receive a “self-reporting” form to complete and return by mail. Larger companies, or those who’ve run into challenges in the past, are more likely to receive notice of a physical audit.

What are business insurance auditors looking for?

The insurance company will look for data points that affect your premium basis. These data points are different for different types of businesses and the various coverages they need.

For example, if you run a warehouse with commercial property and liability insurance, your facility’s square footage is a data point. If you own a restaurant or a bar, your sales figures for alcohol, food and non-alcoholic beverages are key data points.

When it comes to workers’ compensation coverage, payroll is the primary data point. And if you work with subcontractors, your carrier will look for certificates of insurance from any subs used over the past policy term. If you can’t provide proof of your subs’ WC insurance, the company will roll the subcontractor’s payroll into your employee payroll. To avoid unnecessary, additional premiums, business owners should be diligent about maintaining subcontractor files/certs.

Can you tell me specifically which files I need for my audit?

All the data the insurance company is looking for should be outlined in their scheduling request. But don’t wait until audit time to get your ducks in a row. If you’re not sure which files and data points factor into your premium basis, ask your insurance agent.

Will my business insurance premium go up after an audit?

It could. It could also go down. Remember: the point of a business insurance audit is to reconcile the data points you projected (sales, payroll, etc.) with actual operating figures. If you overestimated, you will see some premium returned to you. If you underestimated, your insurance carrier will issue an adjustment for an additional premium… Which is why it’s smart to be conservative when estimating these rating factors.

Will I see the results of the audit?

Yes. You’ll receive an audit summary in the mail. Your summary will outline the difference in premium due or the credit generated. You and your agent should review this summary for accuracy. If any errors are found, you have an opportunity to dispute them.

How will I know if my premium is likely to go up or down after an audit?

This is a GREAT question. Because you should know. Premium adjustments shouldn’t come as a total surprise. The key to avoiding audit shock is regular communication with your agent.

A good business insurance agent will help you avoid getting whacked with a major adjustment, by checking in—at least mid-term—and seeing how your numbers are trending. It is better to have your agent make mid-term policy adjustments with payroll or sales increases, so the additional premium generated is spread among your monthly installments instead of being due, in a lump sum, at audit. If it appears you have underestimated, checking in may also help to ensure you aren’t stuck with the minimum GL premium you were originally given.

What is an estimated audit?

An estimated audit is what happens if you don’t cooperate with the actual audit (i.e. you did not provide the requested info or missed an audit appointment).

In this case, the carrier will estimate your actual data points, which will likely result in a sizeable additional premium for non-compliance.

Can I dispute an estimated audit?

You can and you should. Estimated audits are typically very inflated. If you find yourself looking at an estimated audit, ask your agent to re-open the original audit that you ignored. You can probably get a second chance to address it correctly.

What happens if I don’t respond to my business insurance audit?

You’ll end up with an estimated audit (see above). Eventually, if you still don’t respond or pay, you’ll get non-renewed. Securing new coverage for your business after this happens may prove somewhat difficult. So, bottom line: it’s always in your best interest to respond.

NOTE:  Please be advised that we are not lawyers, healthcare experts, or compliance advisors. This post is intended for general information purposes only, and shouldn’t be viewed as legal, financial, health, or regulatory advice.