Insurance Premium Audits For Contractors – How to Avoid Getting Overcharged in an Audit

CONTRACTORS MUST BE AWARE OF PREMIUM AUDITS. Contractors are often subject to premium audits by insurance companies for workers compensation, general liability, and sometimes even for builders risk. All types of contractors are affected, including plumbing contractors and heating ventilation and air conditioner (HVAC), contractors, electricians, drywall contractors and roofing contractors.

A premium audit involves a review of your company’s financial records and business operations. It determines how much you should charge for contractor liability insurance, workers comp, or any other coverage. The goal is to calculate the final premium earned for a policy that was issued based on payroll, sales, subcontracting, or other variables.

The projections that you provide for sales, payroll, and subcontractor costs will be used to calculate your policy premiums. This information can cause insurance rates to vary. The audit will determine the right premium based upon your actual experience.

An auditor is chosen by the insurance company to perform the audit. An employee of the insurance company or an auditor of an auditing firm can perform the audit.

THERE ARE THREE TYPES OF PREMIUM AUDITS. You may be eligible for one or more of the following depending on how large your premiums are and the operations of your business.

A physical audit – This can be done at your office or at another location, such as your accountant’s.

Phone Audit – A telephone auditor calls you to conduct the audit. This audit is usually for small to medium-sized accounts.

Mail Audit – This is a voluntary audit form that includes instructions and is sent to you. Mail audits are usually conducted for smaller accounts.

AUDITORS MAY QUEST TO SEE RECORDS: Auditors may ask for the following types records:

Journals and LedgersTax filings Individual
Pay Records
Time cards
Vehicle titles
Contracts with clients
Subcontractors and contracts
Record of job costs
Statements on P&L
Balance Sheets

QUESTIONS THAT AUDITORS MAY SKAIN The auditor may ask you questions about your records and operations. The auditor may ask questions to verify that the correct classifications have been applied. An auditor may find that your operations are incorrectly classified. This can lead to a surprise result: a large audit bill. You need to be familiar with your classifications and the boundaries of each one.

An auditor may question the use of any classifications and ask for actual work from your employees.

It is crucial to know which credits are available in audits.

Credits to your audit are often allowed by insurance rating and classification rules. However, your records must be kept to provide all the required information in summary form.

Premiums that are payroll-based will result in you paying for the total remuneration defined in your policy.

In most states, the term “remuneration” refers to money or alternative money and can include:

Holiday pay
Alternative Money
Overtime pay
Profit Sharing Plans: Payments
Contributions to statutory benefits plans
Board and lodging are worth their weight in gold
Tool Allowances

To avoid paying too much for an audit, be sure to understand the following definitions and concepts.

Most states allow overtime to be deducted from the regular pay rate. You must clearly identify it in your records. Payroll records must clearly identify overtime pay.

Except for construction operations, erection operations, and certain executive officer classes, it is prohibited to divide an employee’s payroll into more than one category. If payroll is divided, a daily time card must be maintained allocating work to different classes. In order to avoid all payroll being sent to the highest-rated classification, it is important to keep your daily time cards.

You can avoid being held responsible for subcontractor employees’ injuries by obtaining certificates that insure you as an additional insured. To ensure that you are properly protected by indemnification clauses and held harmless, check your subcontractors’ contracts. Auditors will check to make sure you have followed your policy in relation to subcontractors. Audits can go wrong if certificates aren’t in place or if the auditor determines that payments to subcontractors constitute wages to employees.

Automated records can be set up to give audiors the information they require. You will find that your audits run smoothly and will save you a lot of time in future.

Journal of accounts payable and cash dispersements
A/R journal
All vehicle leases, not just owner-operator.
Statements on annual income tax
Documents to support entries in financial statements and journals
Logs of driver and vehicle
Expense journal
Income Statements
Monthly individual earnings reports
Payroll records, including the payroll journal
Quarterly 941
Registering for vehicles owned
SUI’s (State unemployment reports – DE 6’s for California)
General and subsidiary sales ledgers
All underlying journals