When you purchase Workers’ Compensation Insurance the first time for your business, it will likely surprise you how easy it is to get a policy issued based on very little support documents. Your agent and the insurance company underwriter will pretty much take your word for the number of employees you have, the top of work they do, and how much money you intend to pay them over the next twelve months. You look at your total premium and whisper to yourself, “wow that was much easier than I expected.”
A good agent that knows their stuff when it comes to workers’ comp should advise you about the annual audit and be available to you for at least the first one. Some do, but many do not. An audit takes place at the anniversary of your policy and it is at that time that no one will take your word for anything. Please don’t misunderstand, this doesn’t mean your company and agent think you were pulling the wool over their eyes for the last 11 or so months, they just now need you to prove it.
Typically at least thirty days before your audit, you’ll receive a notice from your company’s auditor advising of when they’d like to schedule the audit and they typically provide a list of the documents you will need to support the premium you are paying for the insurance coverage. Take this notice seriously, an audit must take place in order for you to continue your policy.
What you will need to be prepared for Your Audit
- Every document that the auditor asked for in their notification letter. Nothing more and nothing less.
- Payroll Records – You must provide payroll records for you, your employees, and your subcontractors. You offer this data using your payroll journal, your federal tax reports (form 941), your checkbook, and your petty cash journal.
- Your Employee and Subcontractor records – These records should include the employees’ names and identification numbers, job description, a breakdown of money earned by classification code. (it; $5,000 as a security guard and $20,000 as office manager)
- Cash Disbursement Journal – Your cash journal should indicate cash payments to subcontractors or casual labor and material you purchased with cash.
- Certificates of Insurance – Yes this is plural because if you used subcontractors that had their own workers comp coverage, you will have to prove that coverage was in place during the time they worked for you. In some states, sole proprietors and company officers can opt-out of workers’ comp coverage and if that is the case for you, your state typically has a form you must sign indicating this election.
Unfortunately, this is where a lot of employers find trouble. If they cannot prove that a subcontractor had their own insurance while doing work for the company, the insurance company would have had to provide coverage during that time and so they are going to charge an additional premium based on the earnings of the uninsured contractor.
- Tax Returns – Your personal or company’s tax returns will reveal a lot about your company and the auditor has every right to review it and compare it to the information in the original application.
What Not to Do During Your Audit
It is okay to disagree with your auditor about any part of the audit process but do it in a calm and business-like manner. If you need an extension to gather additional records, ask for one and your auditor will likely grant it.
You must understand that your audit must be completed and if an additional premium is charged as a result of the audit, most insurers will allow you to pay it over time if it’s substantial. The bottom line, however, is it must be done and any additional premium must be paid. If you refuse to complete the audit or refuse to pay the additional premium, the insurer will report your business to the state and you will not be allowed to purchase workers’ compensation from any company until the situation is remedied.
We always recommend that our customers review other insurance policies after completing their workers’ comp audit every year.
Here is What We Recommend
General Liability: Contractors General Liability will be the foundation of protection for your business. The coverage will respond if you or your employees are found liable for bodily injury, property damage, or have a products/completed operations complaint. The coverage also covers defense costs for your business to respond to any lawsuits brought by a third party.
Workers’ Comp: Many states will require contractors to provide workers’ compensation coverage for their workers before they can begin a project. Accidents will happen at the job site that can result in an employee becoming injured and missing work. Your workers’ compensation coverage will provide financial assistance for medical expenses and lost wages.
Surety Bonds: It’s very likely that your state will require you to be licensed before you can begin operations. Most states and customers will require contractors to offer a license or surety bond before you are allowed to bid on a job or begin working.
Commercial Auto: Typically, most contractors will have light and heavy vehicles that require commercial auto insurance to make certain their vehicles can be repaired or replaced in the event of an accident, vandalism, or theft.
Tool Coverage: Also known as Inland Marine Insurance, this policy will provide for reimbursement for expenses to repair or replace tools and equipment. Your tools represent an important part of your livelihood, so we always encourage carpentry contractors to consider this valuable coverage.
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