Rating Basis and Audits
It is easy to when you are reviewing your insurance renewal to get lost in the myriad of information that can be put in front of you. Multiple lines of coverage, the various limits, the deductibles; and then there is the constant voices in our head that are constantly asking “what am I missing?”.
While all the components are important this article is designed to help focus in one key area that is critical and important pre-binding and will also impact and tie to an important insurance function post binding.
The key lines of coverage in an insurance program are all rated on a specific function. The idea is that each coverage line can be boiled down to a “price per unit” of insurance. Below are some examples across notable coverage lines to consider.
Commercial Property Insurance = $0.15 per $100 of Insurable Value
Commercial General Liability = $0.25 per $1000 of Sales
Commercial Auto = $2000 per unit/vehicle
Workers Compensation = $1.50 per $100 of payroll
With the exception of General Liability coverage, all of the measures of exposure (aka what you are insuring) are generally going to be locked. General Liability is unique in that depending on your industry or your preference you might be able to rate your coverage on a different exposure basis. For example, some industry class codes have the ability for General Liability to be rated on payroll, this is a different payroll than what you would have on your workers compensation coverage where you break it out by different job positions or “class codes” but rather it would be a composite payroll number. Be careful with this example as the payroll however should only apply to the employees that are in “production” not those in office/clerical settings. Another example would be pounds, many organizations that operate in food manufacturing have the ability to rate their general liability on pounds.
The only thing that an insured has control over in these equations is what they report for their estimated exposure base. The insurance company is the one that controls the actual cost per unit of insurance, that is what is negotiated on. With that in mind, specific to General Liability, there might be some opportunity over a longer horizon to benefit from a different rating basis.
While rating basis cannot be switched each year with the same carrier, a long term perspective on the cost of inputs might provide a useful hedge in the cost of insurance. For example, if you believe you are going to achieve higher sales while utilizing less payroll it would benefit you to see if payroll could be your rating basis for General Liability. Likewise, if the cost of your raw materials for food production were set to rise generating a price hike for your end customer and therefore increased sales for the same amount of product produced, you might want your general liability rated on pounds. Not every code has the ability to be rated on different exposure basis, but many can, and a strategic decision here can produce long term savings and more importantly stability and predictability in your insurance program.
While ensuring that your exposure inputs are classified appropriately is a key responsibility prior to binding, understanding how these estimates are trued up on the back end is equally important. Insurance carriers will perform audits of your estimates after the expiration of the policy to compare what the actual exposure basis was compared to the estimates provided prior to binding. These audits will generally be performed on General Liability and Workers Compensation and can be performed on Commercial Auto if your fleet is large enough and on an audible program. A request for an audit should generally be made with 30 days of the expiration of the policy period and include a list of all the information that is requested. Audits, depending on your insurance carrier, may be performed either in person, virtually, or through email. Request for audit may come from organizations that are not your direct insurance company and through a third party. It is never safe to assume that an audit is assumed to be accurate, and since the result of the audit directly impacts your insurance premium costs, the following are top considerations and recommendations that should be considered when preparing and reviewing your audit.
When reporting payrolls your payroll software likely has the ability to have workers compensation codes for each type of classification to be built into it. Review those periodically to make sure that employees are coded in the accurate classification that ties to their job responsibilities. If there are questions on how individual employees should be classified, refer to classification description and discuss with your agent.
The general rule of thumb is that an employee needs to be classified into the highest rated code that they have even 1% of their time exposed. However, it is generally understood that an executive who periodically walks into a production space would not be coded as production.
LLC Members and Officers of Corporations are always CAPPED on the amount of their payroll that gets included in the exposure basis.
Officers of Corporations are to be automatically included as covered in workers compensation audits while LLC members are only covered if they are designated to have coverage on the policy. These people should be clearly designated on audit materials to the auditor.
If your General Liability coverage is rated on payroll, make sure that only production payroll is included in that audited number and only provide a gross number unless otherwise requested.
Always request a draft of the audit from the auditor prior to the audit being published. Once an audit is finalized it becomes far more difficult and time consuming to make corrections after the audit is finalized.
Finalized audits should be carefully reviewed and verified by your agent. In addition you should always request a copy of the audit worksheets from your agent. The audit worksheets are the “show your work” aspect that every insurance company legally has to provide to you to demonstrate how they calculated the numbers in the finalized audit. This should break down exactly how they arrived at your audit numbers. This can be done if you received a draft of your audit or at the finalized audit time. Due to the sensitivity of the information your agent may need to work collaboratively with you to get the information but it is the details behind how the insurance company comes up with their calculations. These are normal people as well, they make mistakes often. This includes errors in math calculations, forgetting to cap the payroll of officers or LLC members, misclassifying single or large groups of employees. It is best practice to always double check these things but certainly if the results seem off from what was expected.
You have the right to dispute your audit if you find any errors or disagree with anything in the audit. Typically if the audit is disputed it will put a hold on any potential additional premium that would be requested of the audit and enter into a formal dispute process with the insurance company.
Keep in mind that not every policy that is rated on your payroll, values, or sales are subject to audit. Many lines of coverage are not, be sure to ask your agent if the policy is subject to audit. This is especially true of coverages like Professional Liability, Specialty Products Liability, Cyber Liability, etc. In these circumstances the policy is still rated on these exposure basis but there will be no “true up” at the end. Be cognizant of this when declaring your exposure base as there will not be an opportunity to receive a refund of premium should the estimated exposure base exceed the actual.
