All companies covered by insurance must respond to
insurance audits annually. These audits can be good
experiences if managed correctly, or can become stressful
events resulting in wasted time, premium increases and
adjustments or even cancellation of policies. By knowing
what to prepare and maintaining organized records, you can
survive your insurance audit.
Why are insurance policies audited?
Policies are audited to ensure that the premium charged by
the insurance company reflects their actual exposure, which
was estimated at policy inception.
Insurance audits are performed by employees of the
insurance company or independent auditors hired by the
insurance company; in some cases forms will be sent to the
business for a 'self audit' process. In all cases, the
business must prepare information and utilize the time of
its employees to respond to the audit. Who is involved
depends on the type and size of the company. Personnel
required might include the Office Manager, Accounting
Manager, Controller or external CPAs. These individuals are
responsible for gathering and presenting the information to
the insurance company.
What is the auditor looking for?
Insurance companies audit certain Liability policies and
ALL Workers' Compensation policies. The audits collect
exposure information estimated when the policy was written
and compares it to the actuals. This data is then used for
determining and adjusting premium amounts. Information
typically (though not exclusively) required includes the
following:
* Liability Policies
Gross company sales
Independent contractor costs (insured and
uninsured)
Payroll for certain types of exposures
* Workers' Compensation Policies
Actual employee payroll
Cost of independent contractors if no certificate
or proof of other coverage is provided
This information may be in the form of payroll records,
Federal Form 941, Financial Statements, Check Registers and
Certificates of Insurance from contractors/vendors. A
company's use of contractors can be determined by
information disclosed in the financials or check register.
Contractors/Vendors that do not have valid insurance
certificates proving independent coverage will be added to
the company's exposure totals. Not only do the possibly
uninsured contractors/vendors increase a company's exposure
to loss, they can also cause significant increases in their
premiums.
What makes for a 'good audit' experience?
The main requirement for a 'good audit' experience is
having all the information requested readily available for
the auditor when they arrive on the premises. This includes
easy access to contractor certificates of insurance
demonstrating that the coverage is current and meets
required limit levels. The upfront preparation and
organization by the company can prevent ongoing audit
responses and adjustments later on. Another 'good audit'
experience is no surprises such as large premium
adjustments, amounts due or returns after the audit is
complete.
What makes for a 'bad audit' experience?
If the company cannot readily access the requested data, a
variety of unwanted events can occur including:
Excessive waste of time for the auditor and
company personnel
Company (Policy holder) gets a bill for a large
additional premium for the audit period and next period
Company must immediately contact contractors
requesting certificates and forward to auditor for premium
adjustments, requiring significant time for both parties.
What are the potential consequences of a bad audit?
The results of a bad audit can be severe, especially if the
audit resulted in additional premiums. Policies may be
cancelled due to non-payment of the additional premium or
for non-cooperation in the audit process. Credit may be
affected negatively. Staff will need to dedicate
additional time to correct or adjust audit discrepancies,
resulting in lost productivity and a disruption of the work
routine. Some carriers may remove the company from being
able to do an easy 'self audit' using forms.
How do you avoid a 'bad audit' experience?
Two words - be prepared. Understand what is auditable and
what the audits are based on. Have the requested financial
information available for the auditor. Have readily
available copies of all of the certificates of insurance
from your vendors and contractors demonstrating current
coverage at required limit amounts. Be sure the
certificates are tracked and kept up to date. Implement
some type of automated system that allows the company to
track policy expirations and attach images of the insurance
certificate to expedite the audit process and ensure
premiums are not increased unnecessarily. Automated systems
- notably insurance and vendor tracking software - are
available on the market to help in this process.
To survive your insurance audit, make sure you know what
the auditor wants in advance, collect and organize the
information and be ready to find additional data quickly.
Avoid the pitfalls and surprises of the 'bad audit'
experience!
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GG-One Software has been providing insurance certificate
tracking software since 1994. Their Fastrack Insurance
Certificate Tracking and Document Management product is
available in Web and Windows versions. Visit their website
to learn more.
http://www.ggonesoftware.com
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