What is a general liability insurance audit?
Your business’s liability insurance needs are likely to change over time. Annual insurance audits are necessary to ensure you have the right amount of coverage.
What is a general liability insurance audit?
General liability insurance is typically one of the first commercial insurance policies that small business owners buy. It's an essential safety net for common risks involved in daily operations.
General liability insurance protects from lawsuits in case of an accidental injury. For example, someone might slip and fall on a wet floor, or an item could fall from a shelf and injure someone.
It also covers expenses related to damage a business causes to someone else’s property, like when a restaurant employee accidentally spills a drink on a customer’s laptop. What's more, it provides protection for other types of claims, like libel, slander, and false advertising.
A general liability insurance audit is an annual review of your business’s policy to make sure you have the right amount of coverage for the policy term. It’s similar in many ways to a workers’ compensation policy audit.
Business needs change over time. Your company may offer more products and services, hire new employees, or increase revenue.
Your insurance company will perform an annual insurance audit to determine whether adjustments to your premium and coverage limits are necessary to meet your current needs.
Why is a general liability insurance audit needed?
The amount of coverage and the premium your business will pay for general liability coverage are based on several factors, including your annual gross sales. If revenue increases from the previous policy period, for example, additional coverage may be needed.
Opening a new location, hiring more employees, or increasing operating hours could also change your coverage needs and premiums.
A GL insurance audit doesn’t always result in a premium increase, however. After an audit, you could discover you have more coverage than you need, which may result in a more affordable premium.
This could happen if you shrink your workforce, close an underperforming location, or scale back your operations, which decreases your annual revenue.
Unlike an IRS audit, a premium audit isn’t something to be feared. It can benefit your business by making sure you have the right amount of coverage.
If you don’t update your general liability policy, you could discover you don’t have the coverage you need if something happens. This could cause significant financial problems or put you out of business.
What to expect during a general liability insurance audit
The general liability insurance audit process isn't complicated or time-consuming. Your insurance carrier will contact you when it's time for an audit, so you don’t have to worry about missing it.
Audits are usually conducted by mail, phone, or online for small businesses with no previous problems. An in-person audit with the policyholder may be required for larger businesses or businesses with previous claims or other issues.
Insurance audits are typically completed in 30 days. Here’s what you can expect:
- You'll receive a notification from your insurance agency for your annual audit.
- Your carrier will provide audit instructions that tell you what information is needed and how to submit it.
- You'll submit the required information and answer any additional questions your auditor may have.
- If there are any changes to your policy or premium, your provider will inform you.
How do you prepare for a general liability audit?
Although the general liability audit process is straightforward, you can ensure you don’t spend any more time on it than necessary by keeping good records that are organized and easily accessible. The more prepared you are, the smoother the audit will be.
Some records you’ll likely need include:
Financial data
This includes your business’s gross sales, gross and actual payroll data, cash flow, expenses, disbursements, and general ledger. If you use a popular bookkeeping application, like QuickBooks or Xero, you can quickly run reports to obtain this information.
Tax reports
Your auditor will need to examine your business’s tax reports, including W-2s, 1099s, and federal tax return forms. These tax documents are used to verify the information you provide.
Payroll information
In addition to your salaried and hourly employee payroll, you'll also need information about payments to subcontractors. Your payroll records should also show upward and downward trends over time.
Employee records
Information about employees’ job duties and class codes will help the auditor evaluate their level of job risk. Employees with desk jobs, for example, will have less work-related risk than construction workers or landscapers.
What happens if you ignore an audit?
As an owner or manager, you likely stay remarkably busy with business operations. Although dealing with an insurance audit may not sound like the best use of your time, it’s not something you should ignore. Skipping it could cause significant problems you’ll have to deal with later.
An annual general liability premium audit is part of the agreement you made with your insurance carrier when you obtained coverage. Because ignoring the audit is a violation of the terms, your carrier could increase your premium or cancel your policy since they don’t know your current coverage needs.
Some jurisdictions, licensing authorities, and contracts require businesses to have general liability insurance policies. Ignoring your annual insurance audit could result in financial penalties or legal action if your policy is canceled.
Also, if your premium is increased because of a missed audit and you have an unpaid balance, the debt could be sent to a collections agency if it’s past due. This could harm your business’s credit score and make it difficult to open new credit accounts with vendors and others.
When the audit is done, what should you expect?
After you submit the requested information, you'll be notified of the audit results when it’s finished. You'll receive an audit summary you can review to see what factors influenced a change to your final premium.
If you disagree with the results or find any errors, you can provide additional documentation and request a new review.
An insurance audit could result in a change to your premium amount. If your premium was too low during the previous policy term, you'll be given some time to pay the difference.
If your premium was too high and you overpaid, you'll either be refunded the difference or given a credit you can apply towards future premiums.
An insurance audit can also result in no change to your premium. This typically occurs when there is little or no change in your payroll, sales, work performed, and other business activities from the previous policy period.
How are costs calculated for a general liability policy?
General liability insurance premiums are calculated based on several factors during underwriting, including:
- Amount of coverage
- Business classifications
- Number of employees
- Gross payroll
- Industry and risk exposure
- Location
- Policy exclusions
General liability insurance costs an average of $42 per month, based on average customer premiums. You may be able to get a better deal—29% of Insureon’s small business customers pay less than $30 per month.
Insureon can help before and after a general liability insurance audit
Obtaining insurance quotes can help you know if you are getting the best deal before and after your next insurance audit.
Getting started is quick and easy. Just complete Insureon’s easy online application to compare insurance quotes from top-rated U.S. carriers. You can also consult with an insurance agent on your business insurance needs.
Once you find the right coverage for your small business, you can begin coverage and get your certificate of insurance (COI) in less than 24 hours. If you’re looking for ways to save money on business insurance, our cheap business insurance page offers advice on how to compare policies and get the best rate.
Cyrus Vanover, Contributing Writer
Cyrus is a finance and insurance writer who is passionate about helping people and businesses succeed. He is also the author of the book "Earn a Debt-Free College Degree." He has written for some of the largest financial institutions in the country including TD Bank, Citizens Bank, and many credit unions. Cyrus has also contributed to Newsweek. Based in the Blue Ridge Mountains of Virginia, he enjoys hiking the local trails and exploring old Civil War battlefields and other historical sites in his spare time.
