Understanding General Liability Insurance Audits: Are They Legal and What You Need to Know
Many business owners have experienced a situation where their previous general liability insurance company requests an audit after they have terminated their contract. This article explains the legalities behind these audits and provides insights into the reasons why insurers perform such audits.
Why Your Previous General Liability Insurance Company Wants to Audit Your Business
Your previous general liability insurance company might request an audit if your paid premiums were based on projections that did not reflect your actual business operations at the time of policy issuance. This practice is more common in workers' compensation insurance, but it can also apply to general liability insurance.
The Purpose of Audits
Insurance policies often contain an audit clause. This means that the insurer can perform a review to ensure the premium paid accurately matches the actual risks and operations covered under the policy. Provisions for auditing are designed to protect both the policyholder and the insurer.
Premium Based on Estimates
When you purchase a general liability policy, the premium is often estimated based on information provided to the insurance agent about your payroll and gross receipts. If your actual numbers end up being higher or lower than the estimates, the premium may need to be adjusted.
Common Scenarios Requiring Audits
Sometimes, liability insurance is sold and adjusted at a later date, particularly at the end of the coverage period. For example, if there was a particularly good year with unexpected revenue, the insurer might audit your records to adjust the premium accordingly. Conversely, if your business operations were lower than expected, you might receive a refund based on the audit.
Is It Legal for the Insurance Company to Perform an Audit?
Yes, insurance companies have the legal right to perform audits, and this right is often outlined in the policy documents. If you overlooked or under-estimated your payroll or gross receipts when initially purchasing the policy, you may owe money based on the audit results. Similarly, if your actual operations and risks were lower than initially estimated, you might receive a refund.
Exceptions to Audited Policies
There are certain types of policies, such as BOP (Business Owners Policy), where the premium is determined based on other factors, such as the building's construction, zip code, and office contents. The liability portion of a BOP may not be audited, but this does not apply to all general liability policies.
What to Look for in Your Policy Contract
When reviewing your general liability policy, pay attention to any clauses mentioning "audited premiums" or "premium estimates subject to audit." These phrases can indicate that the insurer reserves the right to perform a post-coverage audit.
Conclusion
General liability insurance audits serve to ensure that premiums charged are fair and accurate based on the actual risks and operations of the policyholder. While it might be inconvenient to receive an audit after leaving an insurance provider, it is a legal and common practice. Understanding the audit process and its implications can help you navigate any future changes in your insurance coverage.