Audits: Why They’re Done and How to Prepare - Capstone Brokerage

By: Kathleen Murray, Capstone Brokerage Client Advocate, April 17, 2018

Now that the yearly task of filing personal taxes has passed, this is an opportunity to discuss another type of filing for businesses that occurs every year – the workers’ compensation and general liability audits. In comparison, insurance audits and filing taxes are similar in that both are mandatory, annually. The workers’ compensation and general liability audits are conducted at the end of each policy period to verify that the premium is correct for the exposure during the policy period. In the event there is a claim, the claim might be denied because the premium exposure for the policy term within the policy period where the claim occurred was underinsured.

Insurance audits are conducted at the company’s discretion by phone, mail or an independent auditor is assigned to conduct the audit in person at the insured’s place of business. Audits will entail the examination of the insured’s books or records to determine the accuracy of the policy premium. The insurance carrier will contact the policy holder by mail or phone, advising that the audit will occur, and outline a list of information for the insured to submit to the carrier by a timely date, usually within 45 days after the expiration of the policy. Because audits are mandatory, if the insured does not respond, the carrier will issue a non-compliance letter and intent to cancel the policy. Audits also ensure that sub-contractors had their own insurance coverage in place. If not, the insured could be charged for their exposure on the policy in the event of a claim. General Liability audits can be determined either by payroll or gross receipts. When general liability premium is determined by payroll, the same requirements for workers’ compensation audits will apply.

When preparing for an audit, the insured should make available only the items that were requested in the audit letter or by the auditor. There is no reason to give them or volunteer more information than what is requested by the carrier.

Some of the standard reports and documents requested are: 1. Payroll summary and Journal; 2. Checkbook, if this is the only summary and journal that is maintained; 3. Federal tax Report – 941 Tax Filings; 4. State Unemployment Tax Reports or Individual Tax Records; 5. All overtime payroll records (reduced rates) 6. Certificates of Insurance; 7. Detailed Description of Business Operations. After the auditor’s information is completed, this information is submitted to the carrier for review and necessary adjustments. The insurance carrier will send a Final Audit Statement to the policy holder. This statement will indicate if any additional premium is owed by the insured or if credits need to be returned or applied to the policy. Typically, these credits or debits are caused by payroll adjustments made by the auditor when conducting the year-end audit.

When the final audit statement is received, if the insured does not agree with the information that was reported by the auditor, the insured must dispute the audit immediately. The dispute must be submitted on the insured’s letterhead, referencing the policy number, the policy period for the audit, and the reason for the dispute. The discrepancies of the reported information must be clearly and concisely listed in the dispute letter. Supporting documentation must be submitted to prove the disputed amount. A prime example would be that at the time of the audit, certificates of insurance were not submitted, and the sub-contractor payroll exposure is included in the audit. When this information is submitted with the dispute, the dispute information will be reviewed, and the audit adjusted accordingly. The audit dispute is where the insured must work closely with their agent for the resolution of the audit. The adjusted premium is instrumental for the agent to adjust their records when submitting a policy for renewal. The only way to ensure your audit is calculated correctly is to understand the process and work in partnership with your agent for audit dispute and submission review.