Almost every commercial insurance client we have asks us during the proposal process what our view is on insurance company audits. Will there be an audit? This company you are proposing, what is their audit process like? Is it better to owe or to be owed at audit resolution? What will the company audit us on? The questions can be endless, and justifiably so as it’s an expense to the client to experience a long and drawn out audit process.
First, let’s address the question of “is it better to owe or to be owed at audit resolution?” The answer here is “it depends” (sorry for all those readers who were desperately hoping that they had found the answer, but seriously, it depends). At our firm, we tell clients that audits should be viewed a lot like your tax bill, due every year in April. What are your views on that tax bill? Do you like overpaying during the year so that you’ll get a nice big check from Uncle Sam in May? Or do you like to owe Uncle Sam, knowing that you’ve been in control of your funds for as long as possible before handing them over? Maybe you like to come out accurate, knowing that you won’t get a big check, but you also won’t be cutting a big check, either. Audits work almost exactly the same way, and your attitude should mirror it. Do you like giving, receiving, or neither?
Second, let’s look at “will there be an audit?” That’s an easy one. Almost definitely, in some form or fashion, there will be an audit. Of course, there are outliers, such as Philadelphia Insurance’s policies that are not audited but re-underwritten for the consequent policy year. That being said, always tell yourself there will be an audit so that if there isn’t one, you are pleasantly surprised.
“What will the company audit us on?” Again, it depends. For workers compensation policies, audits are predicated on 2 things: how your employees are classed (do you have your admin at the service station also pumping gas from time to time?) and payroll within a class code, which is how the premium is derived. For liability policies, it can be based on a number of things such as payroll, gross sales, or any other statistical data that would tell an insurance company how big or risky your enterprise is (for example, a soccer arena may be rated on the number of participants it has in all leagues they host throughout the year). Property policies are almost always rated on square footage. If you’ve reported these things accurately at the start of the policy, then the audit should be a breeze.
Finally, “what is the audit process like?” And once again, it depends. For smaller companies, insurance carriers may rely on just a paper survey or a phone call asking for updates for certain facets of the business. For mid- to large-size businesses, it’s not uncommon to have an in-person audit, where a representative of the company will ask to meet with key people. Of course, this is more time-intensive, but it can result in big returns (for either the client or the carrier).
Audits don’t have to be bad, scary, or time consuming as long as the agent has done his or her job in submitting the correct underwriting information to the company during the assessment process. But miss a zero or forget a building, or even misclassify employees, and the audit process can be a nightmare.