Helpful Hints to Ensure the Commercial Policy Audit Goes Smoothly for the Insured
By Audrey Miller, Esq.
Premium audits sometimes cause unnecessary friction between agencies and their insureds. As such, Agency Checklists asked Audrey Miller to give agents some tips on how to help their insureds navigate this process. A Massachusetts attorney residing on Cape Cod, Ms. Miller worked for five years at Chartis Insurance (formerly AIG) in the company’s premium audit division primarily conducting workers compensation audits.
Why is an audit conducted in the first place?
At the time an insured makes application for a commercial policy, payment for the policy is based on an “estimated” basis (“estimated” payroll for workers compensation and generally “estimated” sales for general liability). However, the terms of the policy will give the insurance company the right to audit the insured’s books to determine the exact amount owed under the policy. The audit is conducted at the expiration of the policy to determine the actual policy exposure. Based on the final audit, the insured may be due a refund or may owe money. In reality, there exist several types of audits including: a form to be filled out by the insured, a telephone audit interview, and a physical audit where the auditor will visit the insured’s location.
What should an insurance agent counsel his or her insured about the audit process?
The key time to discuss the audit is when the policy is written so there are no surprises for the insured. The agent should counsel the insured that an audit will be performed at the conclusion of the policy and that certain records are required to be made accessible to the auditor. Further, the policy is a legally binding contract between the insurance company and the insured and contains specific language allowing for the audit. It is the responsibility of the insured to maintain records, either in written form such as a check register or sales journal or in a more sophisticated manner such as in Quick Books or through a payroll company.
An agent also may offer to sit in on the first audit interview with the client as a show of support. Keep in mind that the interview should always be conducted in the location where the records are kept. The audit will be finalized more quickly if all the records are available at the audit and the key employees (bookkeeper, human resources individuals, principal/owner) are available the day of the audit for any questions or issues that may arise. In the case of a large audit, the agent should certainly attend the audit at the insured’s place of business.
When should one prepare for this type of audit?
Prepare for the audit well in advance of the scheduled audit date or form submission deadline. The auditor and the insurance company operate under a state mandated deadline for the audit to be completed. If the auditor is required to submit the audit without the benefit of having reviewed full and complete records, it is more than likely that the insured will be unpleasantly surprised by the final premium bill and demand that the agent get the bill corrected. That will mean more work on the account as the agent will need to submit a dispute to correct the audit. Essentially, a dispute is a formal request, in writing, from the insured or its agent to re-open an audit due to an error or incomplete records used by the auditor. The insured sends the corrected information or documents with the dispute. The dispute process costs the agent and the agent’s insurance company in terms of more hours of work and can draw out the audit process. A long and drawn out audit process is not going to endear the insured to the agent, especially if the agent has not adequately counseled the insured before and during the initial audit process as to what was required.
Putting the Pieces of the Audit Puzzle together.
There are several pieces to the audit puzzle. The insured should ask the auditor for a letter, via email, specifying all records needed, well in advance of the audit date. In the case of a complex audit, there may be several individuals involved in the gathering of documents and information for the audit. It is most efficient for the insured to simply forward the auditor’s email to each of the parties so that they may begin working on their assigned audit tasks. In the case of a small sole proprietor there may be only one other individual helping the insured, such as an accountant or bookkeeper, who may keep the state and federal quarterly reports current. The agent forwarding the auditor’s letter to this one person, with the insured’s permission, can sometime make the whole process more timely and efficient. Many times involving these people right away will result in a timelier and more complete gathering of all the documents needed for the audit.
In order to minimize the amount of time at the audit, it is customary for an auditor to request the payroll and quarterly records be provided electronically, in advance. The auditor can then attempt to tie out the payroll to the tax filings and if there is an issue it can be worked on and resolved prior to the audit. The agent may wish to advise the insured to protect the sensitive nature of payroll records by encryption. The agent should be especially careful to advise the insured to delete social security and other “personal information” as required underMassachusettsprivacy laws.
What about Certificates of Insurance?
Agents should always advise the insureds that any sub-contractors’ certificates of insurance should be in hand before the sub-contractor starts any work for the insured. Attempting to chase down and obtain certificates after the work is conducted and just prior to the audit may prove impossible for the insured. If the insured cannot prove that sub-contractors had valid insurance, the insured may find that the remuneration paid to the sub-contractors becomes part of the audit calculation.
Certificates of insurance should be provided directly to the insured by the sub-contractor’s agent not by the sub-contractor. Sub-contractors have been known, unfortunately, to alter their own certificates. The insured should maintain 2 years of certificates for each sub-contractor. If an auditor is required to review a large number of subcontractors’ certificates of insurance, it is most efficient for the certificates to be arranged, alphabetically, in a 3 ring binder.
Exit Interview – A Must
If the principal/owner of the business cannot be present at the audit, it is imperative that there be an exit interview conducted by telephone or email reviewing the full audit results with them.
The agent should advise the insured that the auditor will not know what amount of money will be owed or refunded. The auditor, agent and insured can and should discuss estimated exposure versus actual exposure. Money owed or due to the insured, however, is outside the scope of the auditor’s role and should be addressed with the insurance company’s billing department.
This is the time for the auditor and insured and the insured’s agent to tie up loose ends, review outstanding questions, review the law, and discuss issues of concern etc. Likely, there are more audit disputes filed from the lack of a properly conducted exit interview than for any other reason.
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