Beware the Audit!

Are you one of the countless business owners who are going about their pursuits, dealing with the many challenges we face each day, when one day, you get an email from your insurance agent containing an invoice for an audit? “An audit?”, you ask yourself. “$5,000 invoice??”  “I don’t even have insurance with that company anymore”. “What? I’m calling my agent!”.

Remember when the representative from the insurance company called you at the end of the term to ask you your revenue for the year? You looked it up and told them. They thanked you and hung up. That was it. The figure you just gave them was probably much higher than you reported earlier in the year when you first bought the policy. Since your premium is most likely rated on your revenue, and your revenue went up, they charged you the difference.

Here’s why. General liability insurance is rated per $1,000 of revenue. For example, let’s say you are in a higher risk business in the energy field. Your rate per $1,000 may very well be $15. So, take your revenue and divide by $1,000. Then multiply by $15. That’s your pure premium. Pure Premium is the premium before fees and taxes. So, if your revenue is $2,000,000, then the formula is:  $2,000,000 / 1,000 = $2,000 x $15 = $30,000. Yes, $30,000 in premium. Needless to say, if you are underreporting your revenue at the beginning, then you could be paying a lot more at the end.

Why do they audit at the end? That’s because General Liability insurance is occurrence based. That means that regardless of who covers you now, if a demand is issued to you for a past transgression, then that company is responsible for covering you from then on for that time period. Naturally, that insurance company wants to make sure they’re getting paid for it.

So, to avoid a huge audit surprise, report an accurate revenue number at the beginning of the rating period. If you suspect or know that your revue will increase significantly, then tell your agent. Often your agent will be able to get some leeway granted for you. Just show some good faith and keep the insurance company apprised and you may be surprised at the difference that effort makes.