The Insurance Report - April 2006

INSURANCE AUDITS
By Roland L. Enz - President, California Plus Insurance Service, Inc.

Insurance premium is based on the preconceived concept of exposure or risk that the insurance industry and/or insurance company have assigned to each category of business. Whether you are a fleet operator, an owner-operator, a butcher, a baker or a candlestick maker, each exposure premium is based upon a factor.

The factor that insurance companies use to determine your premium may be the total number of vehicles that you operate, their values, receipts, payroll or square footage of the space that you occupy. As you develop and grow, as a company, your insurance needs will increase and additional coverages will be required. It is paramount that you understand these coverages and what factors these coverages are based on.

Premium is based upon the information requested by your agent. That information, compiled by your agent, is turned into a premium by the insurance company’s underwriter. If the information is inaccurate, the premium, quoted by your agent, will not stand up to an audit. The second part of this equation, and possibly the most important, is to review the policy with your agent or broker, after you have received it. Our industry is lazy in the process of reviewing policies with clients. Usually a month or more passes before the policy is received by the agent from the insurance company. At that point, the agent should review the policy prior to sending it out to the insured for any discrepancies. After the insured receives the policy, it is the insured’s responsibility to review and inquire about any uncertainties that he or she has.

Audits on owner-operators are very limited, if not non-existent. An audit may consist of a telephone call or questionnaire. If your liability coverage was written through the Assigned Risk Plan, expect a personal visit by an auditor. Information requested usually follows along the lines of verifying the information that was put on the application. Most importantly, they are confirming the vehicles on the policy and that you are not using, paying to, or operating any other vehicles.

Larger risks will almost always see inspections, and require copies of such things as financial records, vehicle schedule, maintenance, MVRs, safety program and hiring practices. If there are exposures, other than what the insurance company has already committed to, additional premiums may be assessed. We covered Hired Auto in my last article, and I can not over emphasize this – if it exists, the insurance company will want additional premium for the exposure. The majority of companies do not want this exposure and they will cancel your policy.

Audits and inspections are almost always done on such policies as General Liability, Worker’s Compensation and other areas in our industry, such as Warehousing. These types of policies are based upon such criteria as payroll, receipts and square footage. As you can imagine, if inaccurate information is reported at the inception of the policy, lower premiums can be generated. If you are an agent, you are doing a disservice to both you and your client. If you are the client and you report payroll or revenue lower than the correct values, the audit will find these misrepresentations and a higher premium will be assessed. If you misrepresent square footage in a building, and the risk is inspected, again, the inaccuracy will be discovered and a higher premium will be assessed.
If you have been notified by the insurance company that they are going to conduct an audit or inspection, make it a priority to contact your insurance agent. Review the policy and what factors were used to develop premium. It is your agent’s responsibility to guide you through this audit. The insurance company will only look at the bottom line when it comes to audits, and if premium is due, premium is due. They have a short fuse and they will not hesitate to turn any additional amount owed over to a collection agency if it is not promptly paid.

Audits and inspections are a pain in the rear, but they have to be dealt with. Putting it off only prolongs the agony. If the audit is not done, chances are that you will see a cancellation notice. The insurance company has every right to inspect the risk that it insures and they want to make sure that they are receiving premium for the exposure. You can always develop a lower premium by undercutting those factors used to develop premium, but you open yourself up to the harsh reality and shock in the event of an audit. Your insurance company will want all of it at the time of the audit. If you represent your risk properly at the policy’s inception, premium, whether financed or through a company payment plan, will be much easier to absorb throughout the year.

As always, if you have any questions concerning this topic or any other insurance issue, please feel free to call me at California Plus Insurance Service, Inc. in Modesto, California toll free at 1-800-699-7101.