Certain insurance policies, especially general liability and workers’ compensation policies, are auditable because they are based on rating factors that change over time, such as payroll or gross sales. When your insurer commits to write your policy for a year, they are committing to write coverage at a given rate per unit of exposure, not necessarily for a fixed price.
When the economy improves or your business expands, these rating factors also grow, which can result in a surprise bill at audit time if you’re not prepared for it. A little prior planning is all you need.
Before the policy is written
If the growth is planned and can be forecast, it’s best to advise the insurance company of your future 12 months expected payroll or sales. This allows you to plan your cash flow throughout the year to account for the increased cost of insurance.
During the policy period
Keep an eye on year-to-date payroll and sales to find out whether you’re at, above or below your plan. If your business is growing faster than previously expected, you may want to start setting aside some cash to cover an audit bill that will be due at the end of the year.
At the end of the policy period
At the end of 12 months, the forecast rating factor will be compared to actual results based on IRS Form 941 filings and other accounting records. The company may also wish to examine your files regarding subcontractors, making sure they provided you with appropriate certificates of insurance showing they carried their own coverage; otherwise you might be charged for the exposure as if they were working directly for you.
Some insurance carriers work with payroll vendors and “human resource management” software to provide “pay as you go” services for workers’ compensation. After all, who better to know how your payroll is going for the year than the vendor that cuts the checks for you?
Through our partnership with Keystone Insurers Group, we are able to offer sharply reduced pricing on certain human resource management systems that can work with “pay as you go” carriers. That’s one way we are working to create “one less headache” as you focus on your area of expertise.