Over the years I have been involved with many policy audit situations and I wonder how well we really prepare our clients for an audit. Understanding that most Workers’ Compensation and General Liability policies are written on a “deposit premium” basis, do our clients realize that?
Having once collected a $1,000,000 audit on a $60,000 account, I realized early that audits had to be handled properly, each and every time. I think if we better prepare our clients, the audit process will go even smoother. Ultimately we want the client to be happy and have their expectations met and don’t want any surprises.
Some things I learned along the way:
- Read your carrier contracts. Over the years I have read over a 100 brokerage and carrier contracts. MOST of them address audits and how they will be handled. They set the procedures and timelines that you have to follow or you could become liable for the audit premium of your clients! I don’t know about you, but there are less than a handful of clients that I would GUARANTEE that the audit premium was collectible and I would pay it whether or not I was paid. But I can’t tell you how many times the brokerage or carrier contract said I was responsible for collection of the audit premium, even if it was uncollectible from the client! This literally the first thing I look for in a contract!
- Procedures for handling of audits for each of your markets needs to be spelled out and followed to a T. In fact I recommend that a specific management person be in control of this procedure and be responsible for tracking audits. Ultimately if the procedures are not followed, the owners may be the ones on the hook for the audit premium if it becomes uncollectable.
- Audit premiums are “extremely” collectible. By this I mean that when an insured is taken to court to collect, the carrier is almost always successful in getting a judgment in their favor (collecting the judgment is a separate matter if the insured has gone out of business). So it is worth the effort to try and help the carrier collect the audit since you will make commission on the premium if you are successful. Once collected, it goes towards your “earned premium” with the carrier immediately and can help improve your loss ratio with them.
- It is worth understanding how the premium basis is computed. Just because payroll may be the general liability premium basis, all payrolls should not be included. For many classes, executive and clerical payroll (sometimes sales payroll) is excluded. I have been able to get significant return premiums for clients from past carriers by pointing this out. It helps to solidify a relationship with that client when you help get them money back by pointing this out. In fact an “old timer” once told me that with any new client, you should do a three year look back (the normal timetable in policies of how far back a carrier or client can go on audits) at how their premium basis was computed and detect if there have been any prior mistakes. There are a number of other excluded payroll rules (like how to count over time) and you should make yourself aware of them.
- One carrier we represented used an “audit letter” (The letter explained the premium basis, showing what premium basis they used and showed how the rate times the premium basis resulted in the deposit premium). They found that if they took a little extra time up front to educate the client, their audit collectability went up significantly. It also provided a document they could use in court that would show the insured understood the audit provision of the policy, that if their premium basis increased during the policy that they would be responsible for additional premium and that they signed off on this.
- Stay in contact with your clients during the policy term. If you notice you are issuing a significant number of bonds or certificates for clients on new business they were awarded, ask the question on how this will affect their premium basis. Make sure they are setting aside funds during these times so they aren’t left scrambling at audit payment time.
- Make sure clients understand the term “minimum and deposit”. Simply put this means they can only have an additional premium audit and never a return premium audit. Trying to get a carrier to soften a minimum and deposit endorsement or waive it after conclusion of a policy is nearly impossible. If they learn early on that they didn’t get a number of contracts they were expecting and the premium basis will be significantly reduced, get a hold of the carrier at that time and see if they are willing to make adjustments. They might be willing to drop the minimum & deposit percentage to help out. It can’t hurt to ask.
Too many times audits come as a total surprise to a client. It makes for a wedge between the agent and the client that many times results in the loss of the account. It doesn’t have to be that way if we prepare them up front and make the client understand how their insurance works. Pay as you go workers compensation has eliminated the need for audits and has taken the guessing game out of projecting premium basis. This may be something worth exploring in the future.
Hopefully, some of these tips may help and take away some of the angst and frustrations with audits in the future. Happy collecting!
With over 25 years of experience in the insurance industry, Ken Kukral has developed expertise in: Complex and larger accounts, Casualty Insurance, Property Insurance, Inland Marine Insurance, Professional Liability Insurance, Directors & Officers Liability Insurance, Employment Practices Liability Insurance, Products Liability Insurance, Product recall Insurance, Insurance Program Development, Surplus Lines Regulation, Coverage Analysis, Difficult Insurance Placements, Excess and Umbrella Insurance, Carrier Contract Acquisition, Unique or “one of a kind” insurance solutions, Association Leadership and Association Management, Insurance Sales and Marketing. For questions about this topic, or to have an exposure looked at, contact Ken directly at firstname.lastname@example.org