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Insurance Audit series 1 What does it mean for you

Insurance Audit Series 1: What does it mean for you?

October 7, 2022


You’ve been requested to complete an insurance audit. Great, right? Just what you don’t have time to complete during your busy season, or have the knowledge to complete. We feel your pain. It’s not a great process, it’s painful and very time-consuming for all parties involved.

How long have insurance carriers been auditing commercial insurance policies?

Insurance audits have been around forever. Depending on your tenure with a carrier, or individual carrier it could be a new process that is now required to complete. Don’t be alarmed. They are not picking on or singling anyone out. It’s just becoming common practice that all commercial insurance property/casualty insurance policies are now audited. Even though your policy has likely been an auditable policy for years, it is becoming a more utilized process by insurance carriers.

Why are commercial insurance audits becoming common practice?

Carriers are verifying that proper risk transfer is in place.  Are you a general contractor who has sub-contractors that are being utilized for specialty trades?  The insurance carriers want to make sure you’re not responsible for your subcontractor’s work. This is a benefit that could protect assets and future insurance costs by making sure there is proper protection. By doing so with various additional insurance endorsements, primary and non-contributory endorsements, and verifying the proper waiver or subrogation, endorsements are being provided by all sub-contractors. This also results in verifying the limits of insurance for anyone working on the job site and verifying that the subcontractor agreement that is in place is being followed correctly.

Proper cost of general liability policies. Let’s face it. There are a lot of underperforming agents who don’t review policies on an annual basis. This is one reason for the audit process becoming more utilized by carriers.

However, the associated audit costs are a two-way street:

  • If you’re properly reporting payrolls from year to year, this won’t affect you very much.
  • If you’ve overreported your payrolls or sales from goods sold, you will receive a refund for the overage.
  • If you’ve underreported your payrolls or sales, you will receive an invoice for the difference.
  • If you’ve hired new employees mid-term or grown expediently, you may also inadvertently have a larger than normal audit expense due to the increased payrolls or sales for the prior insurance policy period.

Documents and information usually asked for during an insurance audit

  1. The name and detailed duties, which include gross wages for all employees (in order to properly classify employees) for policy period 01/01XX-12/31/XX.
  2. 941’s for 1st, 2nd, 3rd, and 4th quarters of 20XX.
  3. Summarized overtime earnings by employees (if applicable).
  4. Amount paid to temporary and/or casual labor (if applicable).
  5. Names, duties, and amounts paid to subcontractors (if applicable).
  6. Certificates of insurance for sub-contractors.
  7. The dollar amount of materials purchased by you and installed by subcontractors (if applicable).
  8. A description of operations for your business including the number of years in business.
  9. The Subcontractor Agreement that is currently being used.
  10. Sales figures for goods sold during policy period dates.

We’re glad that we were able to help and hope that we have provided valuable information. We advocate for our commercial line clients and help them navigate their insurance audits. We know the industry and how these audits work. We understand the process inside and out, which helps save our customers thousands of dollars in premiums every year just by completing these commercial insurance audits accurately. We’d love to work for you! Click below to start the conversation.

Check out the rest of our commercial audit blog series.

Series 2 covers the proper audit process.  

Series 3 will discuss the importance of separating payrolls by job and employee type-link.

Written by – Commercial Insurance Team at Hitchings Insurance Agency Inc.