From the October 1999 issue of Entrepreneur

If you have business insurance, it's probably going to happen: Your insurance company will conduct an audit.

Insurance companies conduct audits to make sure the premiums you're paying are in line with the amount of coverage they're providing. According to Rhonda Hamel of Hamel and Associates, an insurance audit and education firm in Alpharetta, Georgia, the types of policies most likely to be audited are workers' compensation and general liability. Some companies also audit automobile, garage liability and business-interruption policies.

Insurance companies base initial premiums on estimates that a wide range of variables can affect. After a policy period ends, auditors verify the actual payroll numbers and check other issues that might affect the premium, then the company determines whether they've billed accurately. If they under- or overbilled, you'll receive either an invoice for the additional premium due or a refund.

For other insurance types, auditors examine records that support the basis for the premium, such as sales, purchasing and inventory documentation. If your automobile policy is being audited, for instance, the auditor needs to confirm that the vehicles you are using are the same vehicles described in the policy.

The initial contact from the auditor is either by phone or mail, and you're generally given a week or two to prepare. The auditor will let you know in advance what records need to be examined so you can have those documents available. In most cases, you can't deny the auditor access to requested records; chances are, there's a clause in your policy stating that by purchasing the coverage, you agree to the audit process.

If the auditor finds evidence of fraud, it's reported to the insurance company and to the appropriate investigative unit of your state government.

Hamel offers these tips to make the auditing process go smoother:

  • Have all requested records available. If, for example, certain records are maintained by your accountant, either bring them into your office or arrange for the audit to be conducted at your accountant's office.
  • Get certificates of insurance on any contractors not covered by your workers' comp policy. Be able to prove that any contract labor source doing work on your premises or on your behalf has coverage, or you may have to pay additional premiums based on those labor costs.
  • Discuss record-keeping procedures with your insurance agent and accountant. Proper bookkeeping may reduce your workers' comp premiums. When you pay overtime, for example, you may be entitled to a partial credit against your total payroll for those hours.