What is an Insurance Audit?

Have no fear! The IRS isn’t coming to your business. An insurance audit is something that every business insurance policy is subject to. Some companies will never go through an insurance audit while others go through them every year. Contractor professionals can always expect to receive an audit. In the simplest of terms, an insurance audit is the insurance company’s way of verifying the numbers you gave them.

Are Insurance Audits Important?

Absolutely! I’m not just saying that because I’m in the insurance business. Insurance audits keep rates level for everyone else. At the simplest level, commercial insurance policies are based three things: Sales, Payroll and Square Footage. Square Footage is typically used for building related businesses (ie Leased Offices and Warehouses). These are the least likely to receive an insurance audit because building don’t really change size from year to year. Sales and Payroll can fluctuate every year, quarter and day. Your insurance policy is based on your sales/payroll for the entire year. At the beginning of your policy, your agent will ask you “What are you estimated sales and payroll for next year?”. The insurance company will calculate a rate based on those numbers. You might be saying “Okay Josh, where do insurance audits come into play?”. I’ll tell you…right here 🙂

Gary’s Garage Guru’s installs garage doors on residential homes. Gary estimated his sales at $500K for the year but business was REALLY good to him. Gary had his best year ever with $1 million in sales. The insurance company based Gary’s rate on $500K in sales (500 jobs). Since Gary did 1,000 jobs the insurance company is obligated to cover any faulty installs that Gary and his Guru’s performed that year. This results in Gary’s insurance premium increasing.

Can an Insurance Audit Produce a Refund?

Possibly. Most of your standard companies will offer a refund if your sales, or payroll, are under what you estimated. Most of your non-standard (or excess and surplus lines) carriers will not offer a refund. There are things you and your agent can put into place to make sure you don’t estimate too much and not receive a refund. Your agent should setup a plan of action. Our agency, Consolidated insurance markets, does that with every company that entrusts us.

What Happens We Ignore an Insurance Audit?

That really depends but it’s not a route that I suggest. Ignoring an insurance audit can result in an automatic increase or cancellation of your policy. Most companies have a built in clause that non-compliance with an insurance audit results in a 20% increase in sales/payroll. Some companies will even cancel your policy after not complying several times.”That’s rude. I’m too busy running my business”. I understand and I want you to run your business but this keeps your rates, and everyone else’s, on the same page.

Tom’s Taco Truck generated $100K in revenue last year and was too busy to complete their insurance audit. Their insurance company allowed them to miss an audit and adjusted Tom’s sales by 20%. This happened for two more years. Tom’s insurance company now shows annual sales of $173K but Tom has actually added several trucks and is producing sales of $500K. Wow! Great for Tom! Until they generate $60K in sales one weekend at a food truck festival and got everyone sick. The insurance company covered all the claims filed. Since Tom didn’t inform them of the increased sales their policy was canceled and the insurance company increased rates for all businesses similar to Tom’s. If Tom had completed the insurance audit their policy would still be in place and rates would have stayed level.

How to Prepare for an Insurance Audit?

Stay on top of things. Don’t let an audit be something you avoid or shy away from. Create a plan with your insurance agent. If you’d like someone to review your plan, reach out to me JoshA@CIMTX.com or call 940-391-4238

Thanks for reading!