Proper Preparation for Your Annual Premium Audit
A professional auditor will contact you in advance generally 1-2 weeks prior to the planned audit appointment date. Typically the named contact will receive a scheduling letter in the mail from the auditor. The purpose of this letter is to request your assistance with promptly scheduling an audit appointment and to advise you what records will be needed for accurate completion of your premium audit. To assist you become even more prepared, we have compiled a list of commonly requested financial documents needed for a premium audit. Organizing this information throughout your policy year then having it ready for the auditor on the audit date, will help expedite the process. The auditor should be able to complete the audit at the initial appointment. As a helpful reminder, be sure to review the auditor’s findings (payroll totals, sub costs, employee classification, etc.) before his/her departure. Reviewing the audit with the premium auditor is very important for proper policy coverage and premium basis. Requested documents/records may include:
- Quickbooks report
- Payroll registers (ADP, Paychex, etc)
- Manual payroll sheets or payroll book
Quarterly reports for verification of payroll
- GA DOL quarterly reports provide list of each employee by name and wage
- Employer’s Federal 941 quarterly reports provide lump sum wages paid for all employees
Records that provide the amounts paid to subcontractors or contract labor
- Quickbooks vendor transaction reports/summary
- General ledger or cash disbursements journal
- Check stubs or check register
- Other vendor detail that reflects payments to subcontractors
- 1099s are not adequate records as they do not reflect payments less than $600 nor do they include corporations
Certificates of Insurance
- Subcontractor Coverage Certificates need to reflect coverage during your policy period
- Financial statement to verify total subcontract cost or receipts
- Tax records to verify no employee payroll (Schedule C for sole proprietor, form 1120 for corporations)
- If you report your payroll monthly, have all 12 months of MSRs available at the audit
Work completed by hired subcontractors is in fact auditable exposure. A Certificate of Insurance for workers’ compensation coverage and/or general liability is required from all subcontractors covering the time period each one worked for you. If no certificate is in your possession at the time of the audit you, the contractor/policyholder, are required to pay the workers’ compensation premium for the subcontractor for the time worked. View an example of a Certificate Copy you should obtain from your hired subcontractors or independent contractors showing proof of their coverage.
Builders Insurance Group requires all subcontractors to have workers’ compensation coverage, even if they have no employees and are considered independent contractors, otherwise you will be responsible for paying the premium due. Builders Insurance Group does not accept exclusion forms from independent contractors.
Please be aware of subcontractor certificates from a PEO (Professional Employer Organization) and exempt subcontractors in the states of FL & TN.
- A subcontractor providing a Certificate of Insurance in a PEO leasing arrangement has a potential gap in coverage. The WC coverage only extends to the listed employees with that PEO. Laborers or uninsured subcontractors not reported by the subcontractor to the PEO are a potential exposure and could result in claimants being considered your statutory employee and exposure can be picked up on your final audit.
- Exempt individual subcontractors – in FL or TN contractors can only exempt themselves as an individual from WC coverage. Any exemption MUST be filed with the state, and the valid exemption period MUST pre-date coverage.
As the exemption only extends to the individual contractor, any employees, laborers or uninsured subcontractors hired by the exempt contractor may pose a financial risk to you and may impact your policy premium.
- Exempt contractors with compensation over $100K during a policy period must either furnish a WC certificate of insurance or verification of any labor/materials used by the exempt contractor for audit consideration. Failure to provide this information may result in a portion of the contractor’s payments being included on the final audit.
Certificates of insurance (COI)
Any certificate you are provided should be the original certificate, not a fax or a photocopy. The certificate should indicate your company as the certificate holder. It is suggested you periodically check with the subcontractor’s insurance carrier to be sure the policy remains in effect.
The certificates must reflect coverage for the same time period that your policy was in effect. That frequently means that you will need to provide certificates that reflect two years of coverage for the subcontractor.
- Those that show NCCI as the insurance company name. NCCI is not an insurance company
- Those that show TBA (to be assigned) or TBD (to be determined) as the insurance company
- For GL, we will not accept limits of liability less than $300,000
- Certificates of insurance that show a different named insured than to whom the payment was made. For example, the check was made out to Jim Smith but the certificate of insurance reads Smith Plumbing, Inc. This is not acceptable as the coverage is afforded for the corporation, not for Jim Smith as a sole proprietor or entity. The reverse would also apply. If the check was made out to Smith Plumbing, Inc but the certificate shows Jim Smith, it would not be accepted.
- Waivers of insurance
- When the subcontractor uses an Employee Leasing Company or PEO, if the certificate does not extend coverage by specifically designating the subcontractor on the COI, we will not accept.
If your company primarily conducts business in the state of Georgia; by entering the following address into your web browser allows you to follow up on the status of or existing insurance coverage from your subcontractors by doing a company name search. This type of information can be accessed in other states by visiting their specific government website.
Note: As mentioned above, in some instances it may be necessary for you to obtain two Certificates of Insurance from a subcontractor whose policy effective date overlaps your effective date. For example: If your policy date is July 1, 2015 to July 1, 2016 and the subcontractor’s policy renewed on January 1, 2016 then you will need certificates for the January 1, 2015 to January 1, 2016 and the January 1, 2016 to January 1, 2017 policy terms.
Additional Audit Groundwork
These steps may assist you to eliminate the stress associated with lack of planning before and during your premium audit is conducted:
- Provide your agent/broker with a complete description of operations or business, which will be used to determine applicable classifications.
- Provide your agent/broker with realistic estimated payroll and other applicable exposures. A realistic exposure estimate will reduce the chance of large variation in audited versus estimated exposure at policy expiration.
- Provide your agent/broker with updates regarding any change in operations including ownership changes, large changes in your labor force, establishment of another operation in another state, etc.; this will ensure the issuance of applicable coverage endorsements prior to policy expiration.
- Properly maintain records required for audit with details about job categories, department breakdowns and information about key employees including their actual duties to allow for applicable adjustments to gross payroll.
- Upon contact by your insurance audit professional for an audit appointment, provide contact information for your accountant if you do not maintain your business records so as to facilitate the timely completion of your audit. Be prepared to answer additional questions with respect to personnel and job categories after the audit is completed with your accountant.
- Actively participate in the audit process or delegate to a responsible party when your insurance premium audit professional contacts you for an appointment.
Should you have questions regarding your audit please call our Audit department at (800) 883-9305.