Ensuring an Accurate Final Premium


The idea of an audit doesn’t appeal to most people.

Even the simple word “audit” has a negative connotation. After all, what good could possibly come out of an audit? Does the IRS ever give money back on an audit?

Fortunately, an insurance premium audit might be the one type of audit in this world that doesn’t necessarily mean doom and gloom. Instead, premium audits are designed to guarantee that business owners only pay the premium they truly owe rather than a premium based on the estimated figures provided when their insurance policy was issued.

Premium audits are commonly performed on General Liability, Liquor Liability and Workers Compensation policies. Auditors examine business records to determine the actual figures and make sure that the correct classification codes and rates are used in determining final premiums.

While this could mean that your premium will increase if the information was missing or your actual payroll or sales figures were more than the estimated figures initially provided, it could also mean more money in your pocket if those figures were less than the estimated amounts.

The Situation and Society Insurance Solution

A restaurant in a major metro area became a Society policyholder in 2012 and had a policy that was effective through March 2013.

When the policy was written, the restaurant’s estimated annual payroll was $873,000, while the estimated liquor sales were $1.87 million. After the policy expired, a premium auditor contacted the owner and asked to set up a time to meet with him to get the audit process underway.

While audits may be performed via both mail and in person, the first-ever audit is typically done in-person to put business owners at ease. All Society policies are audited, with premiums of at least $3,500 automatically triggering an in-person premium audit.

The auditor made contact and assured the owner that this was a normal process and not to worry. She also communicated the key pieces of information she would require to complete the audit, including general information regarding the company’s operations and the number of employees, payroll records, subcontractor information, tax documents to verify payroll/sales records, and other sales figures (a more complete list of helpful hints can be found here).

After a week passed to allow the restaurant owner’s bookkeepers to collect the necessary information, the auditor met with the bookkeepers and noted all of the important information. She also logged additional important information for the ensuing policy cycle — for example, the auditor noted that the restaurant was using outside DJs for entertainment.

The entire process took about 45 minutes on April 10, 2013, and when the auditor completed the numbers, they showed $833,000 for payroll and roughly $1.74 million for liquor sales. Both of these amounts were below the estimated figures — a 7 percent deviation on the sales and a 4.5 percent deviation on the payroll — which resulted in a credit on both policies: $725 on the Workers Compensation policy and nearly $1,000 on the liability policy. By April 18, the credits were reflected on the policyholder’s monthly bill.

Helpful Hints:

  • Have the proper person available during a physical audit to provide the records and answer the auditor’s questions.
  • Properly summarize overtime paid to individual employees and organize it by type of job.
  • Construction companies should keep track of the time and payroll for different types of work.
  • Use subcontractors or independent contractors that can provide Workers Compensation and General Liability certificates of insurance.
  • Gross sales should be tracked by the various products, services or type of job.
  • Identify individuals who perform strictly clerical office duties, strictly ouside sales or are strictly drivers.
  • Keep a record of tips for restaurant employees.
  • Report large payroll changes to your agent. Payroll can be changed on your policy during the policy period, and any additional premium may be spread over several installments. Reporting changes will keep the policy more in line with the actual payroll figures, therfore avoiding large differences at time of audit.

The experienced auditors at Society Insurance know that open communication and flexibility is the key to a painless (and potentially profitable) audit process. While an audit might sound scary, our auditors are there to help you understand the process and ensure that you only pay what you deserve. To find out how Society can help your business reach new heights, visit societyinsurance.com where you can find an agent and request a free quote.