Lack of preparation and understanding of the process can cost you thousands.
When your insurance agent sets up your Workers’ Compensation and General Liability policies you are quoted an estimated premium based on your estimates for payroll, amounts paid to uninsured subs, etc. Of course, these estimates are based on your prior year’s activity (unless you are new in business) and your best guess about what changes will occur over the next 12 months.
Since the estimated building activity and the accompanying payrolls and amounts paid to uninsured subs can vary significantly with actual results (up or down), an adjustment must be made to finalize your true premium. Adjustments are made by auditing your actual records.
What to expect
An auditor from the insurance company will normally visit you 30 days after the expiration of your policies in order to review your business records. He will want to review your W-2s, 1099s, and ledger statements. He will also ask to see the certificates of insurance that you have on file for each subcontractor to verify whether such sub is insured or uninsured for both Workers’ Compensation and General Liability.
The auditor will also ask you questions about what kind of work is performed by each employee and uninsured subcontractor. He will ask these questions to determine how each worker should be classified. Since the classification of your workers has a bearing on the rates that you pay, you must be careful with your answers. It pays to brush up on the classification rules for the use of the executive supervisor and residential carpentry codes if applicable to your situation.
After gathering the necessary records, the auditor will recompute your final premium based on your actual payrolls and amounts paid to uninsured subs. You will be billed by the insurance company shortly thereafter. You’ll only have about two weeks to review your billing and dispute your audit (if necessary). Remember, you must pay your audit in full within 30 days unless you are disputing it.
Reasons for disputing an audit
You might you dispute your audit if you disagree with the math, the way a particular worker was classified, or that a particular sub is insured instead of uninsured. Mistakes can cost you thousands of dollars. The best way to check your audit for mistakes is to order the audit worksheet that gives a detailed accounting of how the final premiums were determined. You should send a copy of the audit worksheet to your insurance agent so that he can assist you in understanding it. Due to confidentiality concerns on the part of the insurance company, your insurance agent won’t be given a copy of the audit worksheet unless you specifically request one, which I strongly recommend.
For more information, please see “How Builders Can Survive the Dreaded Premium Audit.”