A liability premium audit might come as an expensive surprise - because you may not have gone through an audit for several years. Most business owners are familiar with Workers Compensation premium audits but have forgotten that Liability Insurance may also be subject to audit. Although insurance companies have the right to conduct these audits annually, during stable or declining economic times they may not go the expense of an audit.
As the economy recovers and business activity increases, insurance companies are more likely to exercise their right to do an annual liability premium audit. So it is important to remind you about audits, how they work, and 5 ways to avoid surprises below.
What policies are subject to premium audit?
Commercial General Liability (CGL) coverage, either as a stand-alone policy or part of a Package policy, IS subject to premium audit. A notable exception is the Business Owners Policy (BOP) form which is generally NOT subject to audit. Your policy will declare in the “Conditions” if it is subject to premium audit.
What is the purpose of a premium audit?
The initial liability premium charged at the beginning of a policy term is a deposit only based on an estimate of the rating basis (usually total payroll or receipts/sales) for the current policy year. The insurance company may perform a premium audit to ensure that you only pay a premium based on your actual risk exposure. An accurate audit at the end of the policy term will adjust your final premium up or down when reconciled against the initial premium deposit.
An expensive surprise to avoid!
If it has been several years since your last liability premium audit you may discover that you inadvertently have been under-reporting your rating basis. That means you have enjoyed lower premiums for past years but now a current audit may create a large additional liability premium (but only for your policy term just ended – not prior years). Nobody likes to face an unplanned expense.
What you can do to avoid surprises.
Contact your agent for advice during the year if you have a material change in your operations. A change in operations may increase or decrease liability risk and create new liability rating classifications and rates on your policy during audit.
The content of FAQ articles are general in nature and are not intended as a substitute for professional legal, financial, or insurance counsel for individuals. Insurance coverage forms vary by issuing company and by state. For specific advice contact us.
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