Many companies have been hit with unexpected additional premium at the expiration of their general liability insurance policy. Below are the steps to determine if and when a policy will be audited. We’ll also discuss how to determine the actual earned premium for the policy term.
Review the declaration page of the policy for reference to audit basis. If the policy declaration page has words similar to the following, then the insured should not experience an unexpected premium at the end of the policy.
* Audit Period: Non-Auditable
* This premium is subject to adjustment with an audit. Yes or No
* Non-Auditable unless circle one of the following: Monthly, Quarterly ,Semi-Annual or Annual
* Premium is: Auditable or Flat
If the policy declaration page does not contain any similar combination of the above words, then look within the body of the policy. Common areas to look at are the Common Policy Conditions, Composite Rate Endorsement, and Business Owners Common Policy Conditions.
If the policy is auditable, as many are for bigger businesses, then the insured should proceed to step two.
Once the insured knows the policy is auditable, they need to know how the policy calculated the original premium. The policy premium calculation starts with the insurance carrier classifying the business. Contracting, retail, manufacturing, and building owners are four main classes of business. Once the insurance carrier determines the class of business, they will know what premium base to use. The four main premium bases are gross sales, payroll, area, or number of units. Then multiply this premium base by a dollar rate that the insurance industry or the carrier assigns that class of business. Usually the insured can find this base rate number within the declaration page, on a rating worksheet, or by asking the agent.
For example, a retail store’s premium base is $1,000 per gross sales. If the dollar rate were $.50 per $1,000 of gross sales, the initial premium would be $50.00 a year. $100,000/$1,000 * .50 = $50.00 would be the estimated premium for the year.
For example, if the insured is expecting $500,000 in total annual sales rather than $100,000, the added premium would be as follows:
$400,000/$1,000 * .50 = $200.00 added premium. Now if the insured added a couple of zeros to the equation with either sales or rates the insured could see a large balance owed at the end of the policy term. Knowing whether the general liability premium is auditable could save the insured a significant amount in unexpected premium at the end of the policy.
If the premium base (estimate sales, units, area, etc.) is not in line with the initial premium charged the insured needs to calculate the correct annual premium and let the carrier know. The sooner the better.
There are a couple of reasons to let the insurance carrier know. The first is so the insured can adjust cash flow. The insured also needs to either start paying more premium now or be prepared at audit time to pay immediately. The second reason to let the carrier know earlier is that sometimes the insured is able to get a lower rate than what will probably be charged at expiration.
As always, it is best to avoid the unexpected surprises by thoroughly evaluating the general liability premium with the agent either before binding the policy or when they deliver the policy to your office.