Most work truck industry businesses have General Liability policies that are auditable on an annual basis. Most companies dread the audit — both the process itself and the impending outcome of additional premium due. So, let’s review the audit purpose and process as well as how to possibly avoid an unwanted and unexpected bill from your insurer.
The purpose of the audit is for the insurer to collect premiums commensurate to your operation’s exposure. Not unlike a Workers’ Compensation audit, a General Liability audit is a mechanism to show what your actual exposure was for the policy term. General Liability policies are written in the beginning of the policy term with an estimate from you of either your sales (used most commonly) or payroll, depending on how your operations are classified. Of course, there’s no way to know exactly what your sales or payrolls will be for the upcoming year.
For example, if you’re an upfitter, you likely sit with your agent at renewal time and estimate gross sales for the coming year. The policy is rated and written based on those estimated gross sales. Then at the end of the year, the insurer will inquire as to what your actual sales were for the term. If higher than estimated, you’ll get a bill for additional premium. Conversely, if sales were lower than estimated, you’ll get a return premium. (Note, not all insurers return premium when the latter occurs. Some insurers are auditable “upward” only. This is a good question to ask your agent before signing up with a particular insurer.
The audit process typically takes one of two forms. One way is the written audit, during which the insurer sends a form to complete and return with your actual sales. They then calculate the total, and you’re informed of the outcome. The more common way is an in-person audit where an auditor comes to your facility, reviews your books with you, and completes the audit form based on their findings. They then submit their form to the insurer for calculation, and you’re informed of the outcome. When you receive the final audit, after all calculations are made, you should end up with a form that confirms what you paid is what you should have paid. In a perfect world, this would result in a credit back to you each year. Unfortunately, it usually turns into a bill for additional premium.
There are ways to avoid being blindsided by a huge additional premium.
First, meet with your agent and discuss your estimated gross sales for the coming year at every renewal. The more involved you are in the process, the more control you’ll have over the outcome. Sales estimates should be as accurate as possible to avoid additional premium due.
Second, understand exactly what information the insurer wants. Using the upfitter example again, auditable sales are always based on gross revenue. This means you cannot deduct chassis cost from your sales figure. By doing so, you’re essentially deducting your cost of goods sold and therefore providing the insurer with gross profit, not gross revenue. This will be caught at audit and the additional premium generated by this type of error can be substantial.
Third, stay in contact with your agent throughout the year if your sales swing drastically in either direction. Your agent should be able to go to the insurer during the policy term and amend estimated sales to your revised forecast. This can help you avoid a big bill at the end of the policy term by breaking up your additional premium in small amounts over your monthly installments. But most importantly, if your sales are looking like they will be much higher than originally estimated, your rate/$1,000 could actually decrease. Many policies’ rates are lowered as sales increase. So, by accurately amending your sales to a higher figure, your agent can often negotiate a lower rate. Then, even if you’re still audited at the end of the year and receive an additional premium, the rate by which it’s calculated is lower, resulting in a lower audit bill than if your agent had not negotiated down that rate.
Ultimately, the audit process is inevitable. But it doesn’t have to be as painful as you think. Talk with your agent, learn the process, and you can have more control over the outcome.