May 04, 2018

To most people, when they hear the word “audit” they immediately have unpleasant thoughts and want to throw out both hands and scream “NOOOOO”.  Many people associate audits with taxes and the big, bad IRS and usually nothing good can come from this experience. But not all audits are bad!

Let’s start with some audit basics. For a business, their insurance cost is usually estimated at the beginning of the policy year looking at factors such as gross sales, payroll, cost of sub-contractors, etc. There has to be a way to determine how much your business pays versus other companies that may be much larger or smaller than you.  The common idea is that the more sales or payroll you have, the more exposure you generate thus the more premium you will pay.  Taking it the other way, if your sales and payrolls go down, your premium should too.

So when you get a notice that your insurance carrier is going to do an audit, it’s not a bad thing. Your policy year started with you and your insurance agent making some guesses on your sales and payrolls. The amount you paid in premium was based on these estimates. Now that the policy year has ended, the company is going to ask for documents to show what your actual sales, payroll, sub costs really were. If the actual numbers come in higher than the estimates on your policy, you’re going to pay a little more. If they come in less than your estimates, you’re going to get some money back. 

There are a few things you can do to avoid an audit shock.

  • First, take time to estimate your starting numbers as close as possible.
  • Consider projects you will start new and other changes that will affect your business in the next 12 months.
  • If you do land a large new account or get awarded a large job, contact your insurance agent and let them know.  You can then adjust the figure so increases can be paid in small installments rather than one large chunk after the audit.

Audits are not always a bad thing.  You may find out you’re getting some money back and that’s good.  Taking some time during the year to review estimates will avoid a dreaded audit shock. 

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