It’s almost tax time. We all know the potential of being audited by the IRS, but did you know that Commercial Insurance policies are subject to audit as well? If this process is confusing, you are not alone. Let us help with the good, the bad and the ugly of the insurance audit.
For most the word “audit” causes blood pressure spikes and head spins, but insurance audits aren’t all bad. The overall purpose of the audit is to keep both the Insurance Company and the Insured on the same page. Most commercial policies are rated on Sales, Payroll or Area. These metrics are the best way for insurance companies to determine how much they are going to charge for insurance. Business Owners buy insurance to cover their business, therefore accurate sales or payroll figures equal accurate premium charged. If sales or payroll are below the forecasted numbers, the insurance company will return the premium that was overpaid.
If payroll/sales figures fluctuate year to year, the audit process can become painful. When an audit is performed it is always on the previous policy term since that provides the most accurate information. The insurance company will require an insured to provide evidence of sales or payroll via income statements or tax reports. If a business owner projected $500,000 in sales but actually did $1,000,000 the audit would reveal the true figures. In the event that sales or payroll turn out to be higher than what was being charged, the insurance company will send a bill for the difference between what should have been paid vs what was paid.
There is one last thing to note about the insurance audit process that can really catch a business owner off guard and create some major cash flow issues. If an audit reveals additional premium is needed, the premium will be due right away. The renewal policy is then also updated to reflect the audited figures which could create a potential increase in renewal premiums. It is important for business owners to make sure they understand the process of the insurance audit. Discussing it with their insurance agent or broker can keep them on the good side rather than the bad and ugly.