What Is a General Liability Audit?

This article is part of a larger series on General Liability Insurance.

A general liability audit is when your insurance agency reviews your risk exposure based on payroll, gross sales, and employees’ job duties. It’s a way to make sure that you have the proper amount of coverage and are paying the correct amount for general liability insurance.

Why Insurers Audit General Liability Policies

General liability policies use certain business information to establish the risk and thus the premium of the policy. But it can be hard to have an accurate account of payroll and revenues at the start of a premium term year. This is why the audit takes place.

The audit will look at your business payroll accounting, taking into consideration whether or not you hired or fired people. It will consider the growth or decline in company revenues. It will assess the risk classifications employees have while working based on the duties assigned to them. If you underestimated financials and coverage needs, you could receive a bill for the difference in your premium. Likewise, if you overestimated data, you could receive a refund of the overpaid premiums.

Are All General Liability Policies Auditable?

Audits are commonly done on general liability, liquor liability, and workers’ compensation policies. Not every liability policy will be audited. Which policies are audited varies from carrier to carrier and may also depend on how old your company is. More established companies with consistent financials are less likely to be audited than a new company with premiums and coverage based on projected financials. Additionally, those businesses operating in high-risk industries are more likely to be audited to ensure the risk is rated appropriately.

The General Liability Audit Process

The general liability audit process is not as arduous as it might sound. The insurance company wants to validate specific financial details and risk factors for your business. If you are getting an audit, you will likely receive a letter informing you of the audit one to three months prior to the end of your policy’s term. It’s essential to comply with the audit request promptly so that your insurance coverage is not interrupted.

For the audit, you may be asked to provide:

The audit may require some or all of the information listed above. To fulfill the audit request, provide the reports requested and the completed audit questionnaire sent to you by your insurance carrier. If you have questions about any aspect of the audit process, contact your carrier, who will walk you through their specific requirements.

One benefit of a general liability insurance audit is that you will have a better understanding of the amount of coverage that your business needs. If you feel you are overpaying for coverage based on the premium determination, you may be able to find a cheaper policy with the same amount of coverage from another provider.

Types of General Liability Audits

The format of your audit will depend on the preference of your insurance carrier. There are four ways an audit may be completed:

How to Prepare for a General Liability Insurance Audit

An organized business owner will be prepared for a general liability insurance audit almost instantaneously as much of the information that the insurance carrier will request is based on your business financials. All that is needed to prepare for an audit is having quick access to your business’s financial data. Once you receive the audit request, print or make copies of the required documents and submit them to the insurance company.

Remember that you’ll likely need to access your payroll data, annual revenues, growth, tax returns, and subcontractor details. If your business has expanded its physical locations, you’ll also want to provide copies of the lease data that details how many square feet your business occupies.

The audit won’t ask for random details about your business. Remember, it wants to verify your business risk and coverage amounts, which are based on payroll, revenues, business size, and industry.

Bottom Line

If your insurance provider asks you to complete a general liability audit, don’t panic. It’s a simple process that insurance carriers use to validate the risk to determine proper coverage amounts and premium rates. The audit often looks at payroll and revenues and is done anywhere from one to three months prior to your renewal. Not only does the audit reconcile the risk retroactively, but it also is used to determine the next term’s premium.

About the Author

Kimberlee Leonard

Kimberlee Leonard specializes in finance and business insurance and has over 20 years of experience between being a financial consultant, insurance agency owner, and owner of a content marketing agency. Kimberlee’s expertise has been featured in articles from a wide range of print and digital publications like The Latest, and The Houston Chronicle.