Auditing Insurance Policies
In the first part of this 4-part series concerning auditing expenses in your construction business, I suggested you harness the power of your inner detective so you can find the evidence and solve the problems you encounter in your financial records. Then, in the second part, the focus was on Auditing Employee Expenses through the lens of Private Detective Sherlock Holmes. For this third part, the spotlight will be on Auditing Insurance Policies.
The Amateur Detective, Miss Marple – in “A Murder is Announced” by Agatha Christy, says, “Really, I have no gifts—no gifts at all—except perhaps a certain knowledge of human nature.”
If you were to bring Miss Marple in to deal with Auditing Insurance Policies in your construction business, her “certain knowledge” would be built on these fundamentals:
Insurance policies are risk mitigation mechanisms.
Proper coverage helps recover faster from unforeseen accidents, calamities, or other events.
To be effective, they must be compliant with relevant laws or regulations.
Solving the Case
Our own (much younger, but just as knowledgeable) version of Miss Marple, Leslie King, our Quality Assurance Manager, lays out the clues that solve problems your construction company may encounter concerning Auditing Insurance Policies.
All insurance policies should be reviewed annually (at a minimum) to check for accurate coverage.
Auto or Vehicle: If you have a fleet of vehicles, it is better to check the policies every quarter to ensure that any vehicles sold or traded are removed from the policy.
Employee Health, Life, and Disability: If you have multiple employees, bills should be reviewed monthly to ensure that any personnel changes have been appropriately removed or added.
General Liability Insurance: With most policies, your yearly premium is based on your estimated gross sales, payroll, and amounts you anticipate paying to uninsured subcontractors for the coming year’s policy period. At the end of the yearly policy period, the insurance company will complete an audit to compare your actual sales, payroll, and subcontractor cost to the paid policy and send you a bill for any increases or refund for any decreases.
It’s best to review your financials quarterly to ensure that your actual numbers align with the policy coverage and that you have Certificates of Insurance on file for all your subcontractors. If your sales or payroll has increased, you should contact your agent to adjust your policy premiums and avoid a large insurance audit bill after the audit. Many contractors underestimate the importance of collecting Certificates of Insurance from their subcontractors before paying for services. They are unaware that their insurance company can bill them for up to 110% (in some cases) of the amount paid to an uninsured subcontractor.
Warning Example: I had a client who received a General Liability Audit bill for over 100K because they failed to collect only a few Certificates of Insurance from highly paid subcontractors who were uninsured.
Note Concerning Workers’ Comp: Collecting (and verifying) Certificates of Insurance regularly is by far the most important thing contractors should do to avoid unexpected insurance premiums at audit time. Many construction business owners collect the certificates from their subcontractors but fail to verify that the certificate actually lists Workers’ Comp coverage.
Pro Tip: When collecting Certificates of Insurance, the certificate should always be emailed or mailed directly from the subcontractor’s insurance company, NOT from the subcontractor.
Warning Example: I had a client who received a fraudulent Certificate of Insurance from a subcontractor and had to pay their insurance company over $60K for the “risk” incurred by that one subcontractor.
A Final Note
My thanks go to Leslie for laying out so succinctly the various components involved in Auditing Insurance Policies. The only thing left to add is a reminder that an internal audit provides you with an early warning system that can prevent problems in your business or when the external insurance audit is conducted.
The final post in this 4-part series deals with Auditing Unused Recurring Charges, Overly Expensive Corporate Service Plans, and Other Expenses. There, you’ll learn more about evaluating whether the benefits are worth the cost and see what might be eliminated or renegotiated.
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