The word audit is defined by Merriam-Webster as “a formal examination of an organization’s or individual’s accounts or financial situation” and it is derived from the Latin word “audire” which means “to hear.” As a commercial property and casualty insurance agent who has reviewed hundreds of insurance audits, I find the Latin root word to be very ironic. You see, the most common root of the mistakes we find in our detailed review of General Liability and Workers’ Compensation insurance audits is in fact, miscommunication.
Miscommunication between an insured and an auditor during the insurance audit process should not surprise anyone, but what might surprise you is that most audits contain mistakes and are never reviewed again once completed. It’s my belief that auditors and insureds alike strive to make sure their audits are done correctly, but I also believe that it is unrealistic to expect the insured to be able to determine, on their own, if the insurance audit has been done correctly.
Unfortunately, most insurance brokers stay out of the insurance audit process and feel it is the responsibility of the insurance company and the insured. Accurate information and communication are two key components to completing an insurance audit accurately. It’s very important for the insured to enlist the help of their insurance broker when attempting to determine the accuracy of their insurance audits.
The insurance broker who placed the insurance coverage can work directly with the insured and the insurance auditor to help ensure that the audit is done correctly. As the intermediary between the parties, the insurance broker has a responsibility to work with all parties, but their principal responsibility lies with the insured and they should work with the insured to make sure they have all of the information they need to complete an accurate insurance audit. The insurance broker places coverage for the insured and should be intimately familiar with the classifications, rates, premiums, coverages, etc., which make up the key
components of an insurance contract. This intimate knowledge, coupled with clear communication and documentation from the client, puts the insured in a much better position to ensure the accuracy of their insurance audits.
The insurance auditor typically begins the insurance audit process by reaching out to the insured and requesting specific documentation which can support the information they need to verify for the insurance audit. The insured provides the requested documentation and the auditor begins the audit process. Prior to March 2020, many insurance audits were completed in person and it gave the insurance auditor and the insured an opportunity to discuss any question they may have had with one another. Even with the opportunity for in-person dialogue, we historically have seen a high rate of mistakes on the insurance audits we review. With many companies limiting in person meetings, more and more insurance audits are being completed without the opportunity for face-to-face meetings between auditors and insureds. We believe the lack of in person communication has led and will lead to an increased frequency of insurance audit mistakes. For this reason, it’s important now more than ever, to work with an insurance broker that is a trusted advisor.
Let’s examine the potential for unnecessary financial losses that could arise from a single mistake on a workers’ compensation insurance audit. The workers’ compensation insurance experience modification factor is based on information received by the National Council for Compensation Insurance (NCCI) from the workers’ compensation insurance providers that have previously provided coverage for an insured. The cost of workers’ compensation insurance premiums is determined, in large part, by the insured’s experience modification factor. If the workers’ compensation insurance audit is incorrect, then the information submitted
to NCCI is incorrect and it can have a negative impact on the insured’s experience modification factor for up to three policy years. Depending on the size of the insured company and subsequent premiums, one mistake has the potential to cost a company thousands of dollars a year, for up to three consecutive years.
The completion of insurance audits and the payment of additional premiums resulting from insurance audits typically have a very clear timeline. Many insurers have a specific process for the dispute of an insurance audit and it’s typically the responsibility of
the insurance broker to notify the insurer of a dispute.
My team and I work hard to dispute insurance audits early and often to make sure they are completed in a timely manner with as little stress as possible. We realize how frustrating and time-consuming audits can be and we do what we can to streamline the process as much as possible for our clients. If you’re struggling with an insurance audit or you think you may have previous
audits that were completed incorrectly, there is a better way — working closely with a trusted advisor from the insurance industry is a great first step.
Phillip Lane, CLCS is a commercial insurance and bonds specialist and Vice President at Insurance Office of America (IOA). Phillip has been an FRSA member since 2008 and has served on the FRSA and FRSA Credit Union Board of Directors since 2015. He also serves on the Space Coast Licensed Roofers Association (SCLRA) and the Treasure Coast Roofing & Sheet Metal Association (TCRCA) Board of Directors and has handled the commercial property and casualty insurance for both the FRSA and FRSA-SIF since 2014.
Previous Article
Next Article