Any mention of the word “audit” is enough to strike fear into people’s hearts. It’s no surprise, given that tax audits are terrifying for businesses and individuals alike.
Insurance audits are incredibly different from IRS audits. Brokers estimate sales for the year when providing a quote for a client, and insurance carriers have the right to check that the policyholder doesn’t have too much or too little coverage.
In some cases, this actually benefits the business because it identifies areas where your client may be overpaying.
Carriers theoretically should audit eligible policies annually, but this doesn’t always happen. As the market is doing well now, your clients will have more money, and auditors will want to check in more frequently. Construction companies, in particular, have witnessed a boom since they deal with a lot of general contractors.
Last year showed an increase in audits, so it’s up to you to ensure your clients have the coverage they need.
What Does an Insurance Audit Look Like?
Insurance audits enable carriers to determine how much risk they’ve insured over the previous year. Companies can go through significant changes in the course of a year, and the insurer wants to make sure that the policy a business has matches the projections reported.
Two of the most important factors for an insurance audit are sales and payroll, both of which are self-reported by the business. The carrier performs an audit to check that the numbers your clients state are accurate.
In some cases, business explodes, and your client ends up doubling the number of sales and payroll expenses that they initially claimed when they took out the insurance policy. Or, as we experienced in 2020, the opposite happens. At this point, the carrier comes in to perform an audit.
The carrier will compare your client’s projected numbers and their actual numbers. Using the same rate that the insurer gave you at the beginning of the year, they’ll calculate the difference between what the business paid for their policy and what they should have paid.
The information surveyed during the insurance audit will not be shared with other entities, including the IRS. The audit is solely to address the insurance rating.
How to Protect Your Clients from an Insurance Audit
The best way to make sure an insurance audit is as seamless as possible is to ensure your clients have accurate information ready and the coverage they need, no more and no less.
Although your clients are likely gearing up for tax season, it’s a good idea to encourage them to create a list of their actual sales and payroll in case of an insurance audit.
If they are audited, the carrier will assess their insurance exposure, which covers the financial aspects of the business, such as the number of employees, payroll, sales, and units.
Payroll includes:
- Hourly/salaried wages
- Bonuses
- Holiday, sick, and vacation pay
- Commissions
- Profit-sharing
- Meals/housing for employees
- Allowances for expenses without a receipt
Payroll does NOT include:
- Tips
- Overtime
- Severance pay
- Expense reimbursements with a receipt
- Personal use of a company car
- Incentives and rewards
Contractor’s Liability Audits
If your client is a contractor, their audit may look slightly different because they perform their work on a job-by-job basis. They may be asked to provide paperwork including:
- Journals
- Ledgers
- Tax filing records
- Payroll records
- Timecards
- Company vehicle titles/registrations
- Contracts with clients
- Contracts with subcontractors
- Balance sheets
- Profit and loss statements
If your client worked with a subcontractor, they’d need proof of the subcontractor’s insurance. If the subcontractor doesn’t have coverage, your client may be liable for paying for them under their policy.
Questions About Insurance Audits
There’s a lot to think about when it comes to insurance audits. Luckily, we’ve seen our fair share of them at Craig and Leicht. We’ve helped agents get their clients through the toughest audits, and we’d be happy to help you gear up for audit season. If you have any questions on what to expect or how to help your clients, don’t hesitate to reach out to us.
