If you have been in the game for a while, no doubt you are very familiar with today’s post and the words “Subject to Audit”. Almost every single general liability policy for General Contractors is going to be subject to audit and most of the policies are rated off gross receipts. What does this mean and why?
To boil it down, when underwriting your company, the carrier needs to know what their exposure is. Common sense can tell us that someone doing $25M is projects is going to be exposed to more risk than someone doing $5M. Because of this, these policies are often rated based on projected gross receipts for the policy period. Once the policy period is complete, the carrier is going to ask you to provide documentation on your actual gross receipt
If you got a policy that was rated based on $25M in gross receipts and you end up doing $30M, the insurance company already covered you for that extra $5M worth of work and are going to charge you additional premium for it. Now, the opposite is also true. If you paid premium based on $30M in gross receipts and only had $25M you should receive a premium refund for the unused portion of what you were charged.
If you are expecting a lot of growth in your construction company it is essential you remember this concept. Growing a company can be very expensive and the last thing you want to forget about is a premium audit bill that is due in full on receipt! Interested in how to ease the blow of an audit? We have some solutions, but it takes us being involved in the entire policy year. Reach out today to see how we can help!
Understanding Premium Audits for General Contractors
Premium audits are an essential aspect of managing insurance costs for general contractors. They help ensure that the premiums paid reflect the actual risk exposure based on gross receipts. Understanding how these audits work can empower contractors to better manage their finances and avoid unexpected charges.
During a premium audit, insurance carriers review the contractor's actual gross receipts to determine whether the estimated figures used for premium calculations were accurate. If a contractor's revenue exceeds the projected amount, they may face additional premiums. Conversely, if their revenue is lower, they could receive a refund for the overpaid premium, making it vital for contractors to maintain accurate financial records throughout the policy period.
How Gross Receipts Affect Your Insurance Premiums
Gross receipts play a crucial role in determining the cost of insurance premiums for contractors. These figures are used by insurance companies to assess risk and calculate the appropriate premium for coverage. Understanding this relationship can help contractors make informed decisions about their insurance needs.
Insurance carriers typically base their initial premium calculations on projected gross receipts, which represent the expected revenue from contracts. If a contractor’s actual receipts differ significantly from these projections, it can lead to adjustments in premium costs. This dynamic underscores the importance of accurate forecasting and diligent record-keeping to avoid unexpected financial burdens at the end of the policy term.
Best Practices for Preparing for a Premium Audit
Preparing for a premium audit involves several best practices that can help streamline the process and reduce potential discrepancies. Contractors should maintain detailed records of their gross receipts and ensure that all financial documents are organized and easily accessible.
Some effective practices include regularly updating financial statements, keeping track of all contracts and invoices, and consulting with an insurance advisor to clarify any uncertainties regarding policy terms. By proactively managing their financial documentation, contractors can facilitate a smoother audit process and minimize the risk of facing unexpected premium adjustments.
The Importance of Communication with Your Insurance Carrier
Effective communication with your insurance carrier is vital for navigating the complexities of premium audits. Contractors should feel empowered to ask questions and seek clarification on any aspects of their policy that may impact their audit outcomes.
Engaging in open dialogue with the insurance provider can help contractors understand how their premiums are calculated and what documentation is required for audits. This proactive approach not only aids in compliance but also fosters a stronger relationship with the insurer, which can be beneficial in negotiating terms and conditions in the future.
