WHAT DO CONTRACTORS NEED TO KNOW ABOUT PREMIUM AUDITS? Most
contractors find they are subject to premium audits from
insurance companies for general liability, workers
compensation, and sometimes for automobile, and even
builders risk insurance policies. This applies most types
of contractors, including general contractors, plumbing
contractors, heating ventilation and air conditioning
(HVAC) contractors, electrical contractors drywall
contractors, painting contractors, roofing contractors, and
so on.
A premium audit is a review of your business operations,
financial reports, and records to determine what to charge
you for your contractor liability insurance, workers
compensation, or other coverage provided. The objective is
to determine the final earned premium for a given policy
that was issued on the basis of payroll, sales,
subcontracting costs, or other variables.
When policies are issued, the premium is often based on
projections you provide for sales or payroll. Your
insurance rates can vary based on this information, the
audit determines what the correct premium should be based
on your actual experience.
An auditor selected by the insurance company conducts the
audit. They may be an employee of the insurance company,
or an employee of an auditing firm, or even an independent
contractor.
THERE ARE THREE TYPES OF PREMIUM AUDITS. Depending on the
size of your premiums and your operations you may get one
of the following:
Physical Audit — Conducted at your premises or at a
secondary location such as your accountant's office.
Phone Audit — An auditor contacts you over the phone
to complete the audit. This type of audit is generally for
small- to mid-sized accounts.
Mail Audit — A voluntary audit form with instructions
is mailed to you. Mail audits are generally conducted for
smaller accounts.
RECORDS AUDITORS MAY ASK TO SEE: Auditors are likely to ask
for one or more of the following types of records:
Journals and Ledgers
Tax filings Individual
Pay Records
Time cards
Vehicle titles
Contracts with clients
Contracts with subcontractors
Records of Job Costs
P&L Statements
Balance Sheets
QUESTIONS AUDITORS MAY ASK The auditor will likely ask
questions about your records or operations. They may be
asking questions to determine if the correct
classifications are being applied. If an auditor decides
your operations are not correctly classified, it can have
an unwelcome surprising result of a large audit billing.
Make sure you understand your classifications, and how the
boundaries of your particular classifications are defined.
An auditor may ask for a tour of your operations, if they
feel it may be necessary to verify correct classifications
are being used.
Be familiar with how credits can be applied to your audits.
Insurance classification and rating rules often allow
credits to your audit, but your records must be maintained
to provide the necessary information in detail and summary
form.
When premiums are based on payroll, it is generally defined
as Total Remuneration for services performed by an employee.
Remuneration in most states, means money or substitutes for
money, and includes:
Bonuses
Commissions
Holiday Pay
Other Money Substitutes
Overtime Pay
Payments made to Profit Sharing Plans
Payments made to statutory benefit plans
The value of board and lodging
Tool Allowances
Wages
Understand the following concepts and definitions to help
make sure you avoid overpaying from an audit.
OVERTIME
In most states, the amount attributable to overtime in
excess of the regular time pay rate may be deducted. It
must be clearly identified in your records. It must be
shown separately by employee and in summary by class of
work.
DIVISION OF PAYROLL
Division of an individual employee's payroll to more than
one classification is not allowed, except for construction
or erection operations and/or certain executive officer
classifications. For construction or erection operations,
the payroll of an employee may be allocated to each type of
work performed on daily time cards. If not, wall wages will
be charged against the highest rated classification to
which the employee is exposed.
SUB-CONTRACTORS
Avoid becoming responsible for injuries to employees of
subcontractor, by obtaining certificates of insurance
naming you additional insured. Also, include in your
subcontract agreements hold harmless and indemnification
agreements in your favor. Auditors look to see if you have
adhered to the terms in your policy as respects to your
subcontractors. Sometimes audits go bad when the
certificates are not in place, or the auditor decides
payments to subcontractors are really wages to employees.
AUTOMATED RECORDS
Set up your automated records to provide audiors what they
need, and you will find your audits go smoothly, and save
you lots of time in the future.
DOCUMENTS YOU MAY BE ASKED FOR AT AN AUDIT
Accounts payable journal and cash dispersements
A/R journal
All vehicle leases, including but not limited to,
owner-operator leases
Annual income tax statements
Documents supporting entries in the journals and financial
statements
Driver and vehicle logs
Expense journal
Income Statements
Monthly Individual earnings reports
Payroll records including the payroll journal
Quarterly 941's
Registrations for owned vehicles
SUI's (State Unemployment Reports - DE 6's in California)
General and subsidiary sales ledgers
All underlying journals
----------------------------------------------------
Don Bury is a nationally recognized expert on negotiating
with commercial insurance brokers. Author of "Buyers Guide
To Business Insurance" in 1993, over $20 million in cost
reductions have been delivered so far.
Contractors get free help at
http://www.contractorinsurancetoohigh.com
Don Bury, President
Insurance Cost Reduction Services
3663 Camino Bella Rosa
Sierra Vista, AZ 85650
Phone/Fax: 800-760-1867
email: donbury@icrs.biz
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