Implications of a General Liability Audit on Small Business

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General Liability Audit


The What & Why You Received An Audit

Business conditions are liable to a multitude of changes that might impact the growth of a business. Small businesses should be able to handle changes in government regulations, personnel shifts, and technological advances. These small changes often change a company’s exposure to liability lawsuits. The general liability auditing determines if the company’s policy is adequate and if adjustments in its premiums, deductibles, and coverage are required to accommodate any changes in the business.

General Liability Auditing

Most of the data required during an audit come from the federal payroll tax returns. The company’s payroll information is vital when it comes to establishing how much risk the company is exposed to.

The auditor also checks if the company has proper employee classification concerning which area of expertise each employee is based. Classifying each employee depending on the jobs they do means that all the employees are exposed to different levels of risk and, therefore, should be insured in the same manner.

General Liability audits are supposed to inform the business owner about the company’s changes that might affect its liability. It also confirms the adequacy of business insurance that covers the company.

Preparing for a general inspection is easy. You should dig out the business insurance documentation and payroll data, which will help the auditor to determine if the current policy provides adequate protection against risks.

There are two types of liability audits. They include a sales-based inspection and a payroll-based review, which are discussed in detail down below.

Payroll-Based Audits

A payroll audit analyses the company’s payroll to ensure accurate documentation that can easily portray each employee’s exposure to risk. An auditor examines tax withholding, wages, and employee pay rates.

A proper payroll review should be conducted at least once every year to ensure that the process is up to date.

A payroll-based review is one that requires particular company documentation. It requires the company’s accountants to provide an accurate payroll breakdown in adherence to the federal payroll tax returns.

While preparing payroll-based audits, some of the vital documentation required includes source documents that have proof of all the transactions conducted by the company during the policy period and verification documents from the revenues office.

Apart from the insurance implications of a payroll review, the findings of this review can also be used in preventing payroll fraud while even weeding out ghost employees in the system.

The review is also meant to verify that the tax withholding is accurate and are compliant to the employment rules and regulations.

Sales Based Insurance Audits

When conducting a sales-based insurance review, some of the critical documents required by insurance providers include source documents and verification documents.

This type of inspection will require the business owner to provide sales information from the policy period. Some of the source documents needed during this review include sales journals, general ledgers, and income statements.

Verification documents include; federal tax returns, state sales tax returns, and income statements depicting the profits and losses in the business.

How to Prepare for a General Insurance Audit

Below are some of the critical factors that you need to consider when you are preparing for a liability review by your insurer:

1. Determine each employee’s class code and separate the payrolls

Each employee should be classified to depict the total risk exposure when they are at work. For instance, a construction worker has high liability as compared to an office clerk.

Some employees also participate in both upper and low-risk jobs, thus requiring the employer to split the payrolls to get the exact amount needed to be insured.

2. Check the payroll and sales estimates in the current policy.

This is done to ensure that the company remains on track in terms of the last policy. This helps small business owners to keep track of all the record all the payrolls throughout the year to avoid large review bills.

The estimate given at the beginning of one’s policy can be adjusted to suit the changes that have occurred in the business during the policy period.

3. Collect insurance certificates from all the subcontractors you use.

Collecting insurance certificates from the subcontractors you have used will allow the auditors to assess the extent of liability the company is exposed to under such operations.

4. Simplify the auditor’s job.

In most cases, an insurance provider will inform the small business owner before sending an auditor. Therefore, it is both time and cost-effective to have all the required documentation ready for the review.

In some cases, business owners often appoint an employee with a proper understanding of the company’s financials to assist with the audits.

Bottom Line

One of the critical areas of running a small business or company that should not be neglected entirely is the general insurance auditing. Failure to comply with the company’s review reports might lead to falling short of its bottom line.

Insurance companies are legally allowed to estimate the extent of liability and thus calculate even higher premiums if business owners refuse to conduct liability audits.
The goal of a review is to bring awareness to situations that can affect your insurance premiums.

These include changes in employee wages, taking up new clients, or shifting the business dynamic to more high-risk clients.

Hurricanes, Floods, Losses O’ My!

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Hurricane & Flood Losses

In the insurance world, a catastrophe refers to an event in which insurers anticipate claims of at least $25 million, and where thresholds are met on the number of claimants and insurers against whom claims are filed. The statistics below on losses from hurricanes and flooding reveal many catastrophic events within the last few years.

Hurricanes

Nearly 40 percent of catastrophic events come from hurricanes and tropical storms. These events bring devastation in the form of high winds, storm surges and torrential rains. While wind certainly contributes to damages, flooding can inflict an extremely heavy and overwhelming toll on property holders and communities. The flooding aspect of tropical systems place many communities well inland at risk of being part of the disaster.

The 2018 Hurricane season carried an estimated price tag, in terms of losses, of $33 billion. Between 1980 and 2018, hurricanes and other tropical systems have inflicted damage totaling approximately $919.7 billion, adjusted for the Consumer Price Index. This translates to an average of $21.9 billion in damages per tropical cyclone striking the United States during that period.

From 1900 to 2017, the United States experienced 36 hurricanes with costs of at least $1 billion. Four of these storms struck in 2016 and 2017 — Matthew (2016) and Harvey, Irma and Maria (2017). Harvey ($125 billion), Maria ($90 billion) and Irma ($50 billion) ranked, as of the end of the 2017 Hurricane season, among the top five costliest hurricanes. Katrina (2005), at $161 billion, remains the most expensive in United States History. Sandy, third-ranked on the list, struck in 2012 and left damages of approximately $71 billion.

In 2018, two hurricanes (Florence and Michael) each inflicted billions in damages. Florence-related losses covered by insurance policies (not counting those covered by the National Flood Insurance Program) ranged between an estimated $2 billion and $5.5 billion. The estimated total damages from Florence reached $17 billion. For Matthew, insured losses carried estimates of $6 billion to $8 billion, with total losses climbing to nearly $11 billion.

Flooding

In addition to tropical systems, heavy rain events from thunderstorms and stalled or slow-moving unstable weather patterns create flooding damage. On average, flooding causes $8 billion annually. From 2000 to 2017, catastrophes involving flooding have resulted in damages north of $750 billion. In 2017, NFIP paid damages of over $8.7 billion for flooding losses. This more than doubled the nearly $3.7 billion in 2016.

Think you’re immune from flooding or the costs from it? According to the Federal Emergency Management Administration, the vast majority of counties and parishes in the United States (98%) face flooding events. More than one in five claims for flooding damage originate from places not considered at high risk for flooding. These numbers bear witness to the reality that not just coastal counties or those located along rivers experience significant flooding problems.

It does not take a catastrophe to accumulate significant damages for households. For the average home, considered by FEMA to be 2,500 square feet and one story, merely an inch of flooding in the structure translates to a potential loss of $26,807 to real and personal property. With four inches of water in the interior, that loss exposure climbs to $103,355.

Why You Need to Examine Your Property Coverage?

Standard homeowner’s and property casualty insurance policies do not cover damage from flooding. Those who do not live or own property in floodplains, and, thus, are not required by the federal government or normally by their lenders to have flood insurance, may not believe they need it. The realization that homeowner’s coverage does not avail for flooding damage, whether catastrophic or relatively minor, does not hit until the owner files the claim. Want to learn more? Check out Bankrate’s Guide to Flood Insurance

Congress created NFIP in 1968 out of concerns that standard insurance did not cover floods, and the costs of disaster relief and restoration from these events fell ultimately to taxpayers. Policies issued under NFIP afford coverage of $250,000 on the home itself and $100,000 on the contents in the home. Premiums for NFIP coverage average $700 annually. To access this coverage, your community must enact and enforce ordinances for protection and management of floodplain areas.

If you cannot obtain coverage from NFIP, usually because your property does not lie in a community with the necessary ordinance, you may find private companies to cover flooding. This insurance may come as a separate policy or an endorsement (or extra) to a homeowner’s policy.

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