The Importance of an Annual Commercial Insurance Audit

January 13, 2023 · 6 minute read · Commercial Lines

Blog The Importance of an Annual Commercial Insurance Audit

Insurance audits are done to assess the level of risk for companies and to help adjust premiums for the coming year. Leavitt Coastal Valley provides commercial insurance services to take the hassle out of the process, making sure businesses get the best coverage possible at the lowest possible price.

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The new year is quickly approaching. As a business owner, you're probably planning for the year ahead. Therefore, now is a great time to plan a commercial insurance audit with your commercial insurance broker

What Is an Insurance Audit?

When most people hear the word "audit," they usually think they're in trouble with the IRS. However, insurance audits are often favorable for business owners. Insurance audits are necessary to ensure you don't have too little or too much coverage. In addition, they also make sure you aren't paying too much for the coverage you do have. Essentially, insurance audits ensure your business is fully protected for the most cost-effective price.

Without a yearly insurance audit, you run the risk of having your coverage lapse. Not only does a lapse in coverage set your business up for legal consequences, but you also run the risk of financial consequences, including an increase in your premium when your coverage is reinstated. 

Usually, your insurance company performs your audit. However, in some cases, a third party can perform the audit. Your auditor will look at your company under a microscope to determine your level of risk. Once they determine your level of risk, they will determine if your company has underpaid or overpaid on your insurance premium. 

Additionally, your auditor will adjust your premium for the coming year, especially if your current coverage does not line up with your level of risk. Usually, your insurance company should perform an audit around three months before your current insurance policy expires. They may ask you for specific information, calculate a premium based on your provided information, and then adjust your premium as needed. 

Most Common Types of Insurance Audits

The type of commercial insurance your business needs depends in large part on what state you operate in. Most states require any size business to have at least general liability insurance and workers' compensation. However, you may also need professional liability insurance. Two things that affect the types of annual audits you need are the types of insurance you have and the size of your business. Smaller businesses usually need less coverage and have a faster audit process. 

General Liability 

Most states require companies to have general liability insurance. When performing an audit on this type of insurance, your auditor will look at the risks your business has of harming others, whether directly or indirectly. If any business activities could cause harm, you should get a general liability audit to assess your risk level. 

Your auditor will assess your level of risk based on what your liability insurance covers. Typically, general liability provides coverage for the following:

  • Litigation costs
  • Personal injury, settlement, or court-awarded damages
  • Medical expenses if an injury occurs 
  • Cost of replacing or repairing lost or damaged property 
  • Injury due to libel or malicious advertising
  • Injuries or damage that occur on your business premises 
  • Damage or harm caused by your business operations

Workers' Compensation

Every state, except for Texas, requires businesses to have workers' compensation insurance. In most cases, workers' compensation is calculated by multiplying payroll costs and class modifiers, which affects your risk factor. For California businesses, class codes and risk factors are set by the state and not by national standards.

This type of audit is necessary to ensure every employee has coverage, that you are protected in instances where an employee needs compensation, and that the numbers you report to your insurance company are accurate. 

Professional Liability 

Not every business is required to have professional liability insurance. However, drug and alcohol treatment centers and other medical facilities require this type of insurance. Professional liability insurance covers settlements, fees, and legal expenses if a patient or visitor is injured due to negligence or claims of negligence. 

What You May Need For Your Audit

Asking your insurance broker to perform an annual insurance audit is essential to ensure you pay the correct premium and have the right coverage. Depending on your business and coverage type, your broker may need different information from you. However, in general, you can expect to submit the following: 

Company Information

Every audit starts with basic company information. Your auditor will need to know how your company operates on a day-to-day basis to assess your risk accurately. You may need to provide a list of employees, their job descriptions, and any volunteers you have. 

Payroll Information

Most audits require companies to report gross pay and provide payroll records. In most cases, you will need to provide your auditor with the following information:

  • Wages 
  • Any bonuses 
  • Holiday and vacation pay
  • Sick pay
  • Worker's compensation pay
  • Any contributions your company made to employees' retirement or health-savings accounts
  • Overtime pay

You will also need to provide tax information and essential documents for your employees and your company as a whole. These documents include the standard 1099s, W-2, W-3, and other documents you submit with your annual tax return.  

Contact Us to Get Started

Commercial insurance can be complicated, especially for drug and alcohol treatment centers. Luckily, the brokers at Leavitt Coastal Valley are here to help. Even though we are part of one of the country's largest private insurance networks, we still have that small-business mentality. This customer-first attitude means we work to create a long-lasting relationship with our clients. Our team members work hard to ensure you get the best coverage possible at the lowest possible price. As a treatment center, your focus should be on providing the best possible care for your patients. As insurance brokers, we take the hassle out of commercial insurance and make the process simple from start to finish. Contact us today at (805) 925-8607 to learn more.