Many commercial insurance policy premiums are rated on a variable basis such as payroll, gross sales, or contract cost, and are subject to annual adjustment following the policy expiration. This is the most equitable method of obtaining a fair premium for exposure to risk.
Your Commercial Insurance Policy is pre-paid. The insurance company charges a deposit premium, and the premium adjustment may be either an additional premium or a refund for over-estimating the rating basis. The insurance company will send one of their employees to review your books to obtain this information, though occasionally you will receive a form to complete and return. Telephone audits are not as desirable since there is no “paper trail” available to correct errors.
Your insurance company is not allowed to provide anyone else with copies of your audit results, as this information is considered confidential. The premium adjustment endorsement will be sent to your agent. Be sure to ask many questions of the auditor relating to special payroll limitations, officer restrictions, etc. It may result in premium savings.
In addition, request a copy of the auditor’s handwritten worksheet. This may be invaluable when checking the audit results. The audit adjustment usually takes place between 30 and 60 days following expiration. Your copy of the audit results will be mailed with premium adjustments about four weeks following the audit.
The most common rating basis is payroll, followed by gross sales, but may be admissions, area, total cost, etc. Some rating bases are unique to the class, such as hospitals, which are rated on the total number of beds.
Gross sales includes the entire amount charged for all goods sold or distributed, services provided, rentals, dues, or fees. There are a few areas which may be excluded from gross sales: sales or excise taxes which are collected and submitted to a governmental division, installment finance charges, freight charges if billed separately, and royalty income from patent rights or copyright income. Rates are normally applied per $1,000.
Payroll includes all remuneration such as commissions, bonuses, and piece work. Unlike Workers Compensation, the following may be excluded from ratable payroll-tips, group insurance premiums, severance pay, clerical office employees, outside salespersons, drivers, and drafters. You may exclude the overtime amount if your books are set up to distinctly show overtime apart from regular wages. Most insurers will limit ratable payroll for officers to $27,400.
Independent Contractors Coverage
Independent Contractors Coverage provides only for your secondary liability caused by an independent contractor. An independent contractor is a sub-contractor who has a specific job to do according to his agreement with the general contractor, but who exercises control over his part of the job. The basis of premium for Independent Contractors Coverage is the total cost to you for all work let or sublet in construction. Be sure to obtain Certificates of Insurance from all independent contractors and have them readily available for the auditor.
Contractual Liability is assumed by you under contract. The basis of premium for Contractual Liability is the total cost of work designated by each contract.
Some auto policies are subject to annual adjustment; however, most are not. For proper credit, a continuous record of vehicles must be maintained, listing date of acquisition/sale, amount of purchase, and usage.
The most common adjustable property coverage is property subject to monthly reporting. Most insurers will charge a deposit premium based on 75% of the policy limit. Following expiration, the average reported values are then calculated and the provisional premium is adjusted. Note that even though you may report values exceeding the policy limit, you do not have coverage unless the policy is changed. You could, however, be charged for this additional report even though you do not have the coverage.
Be certain to place an employee’s entire payroll in the proper classification. You may not divide payroll for those employees working several jobs. They must be assigned the highest rated category. Payroll means total remuneration whether in money or a money substitute, including items such as wages, commissions, bonuses, tips, profit sharing, etc. Work with the auditor or your agent for proper job classifications to avoid unnecessary premium expense.
Executive officers may be limited to $1,300 per week for ratemaking purposes. Sole proprietors and partners may be limited to $22,200. This amount varies each year, so be sure to check the current limitation amount. Also, be aware that those persons holding 25% or more ownership may eliminate themselves from coverage. Ask your agent for more details.
Ratable payroll does not include overtime wages. Your books must clearly list overtime to apply. Furthermore, all direct payroll is subject to audit, but subcontractors are not. You must demonstrate evidence (such as a Certificate of Insurance) that all subcontractors who worked for you during the policy term carried workers compensation insurance for this exemption to apply. Courts will require payment from your insurer for injuries if the subcontractor has no insurance.
Record Keeping Hints
The auditor will be happy to assist you in developing methods of compiling the necessary information best suited to your specific business.
The following are the best sources of information for a premium audit:
- Payroll journal providing monthly totals and division of payroll by type of work performed
- Individual earnings records, indicating the type of work performed. The date hired and/or terminated should be indicated. Gross payroll and overtime should be totaled by the month and quarter.
- Cash disbursements journal with monthly totals disbursed to various accounts, including materials, subcontractors, and casual labor
- Cash receipts in sales journal totaled by the month and assigned to various categories.
- Vehicle titles, registrations, or ownership tax receipts
- Certificates of insurance indicating coverage for subcontractors
- Data processing printouts or computerized records differ widely in their value to the auditor, depending on the program.