Virginia Hamill

Product liability insurance covers a business’s financial loss by paying for the business’ legal fees if its product harms a consumer. Policies typically pay for lawyer bills, court awards, and even the injured party’s medical bills if the business is found liable. Product liability insurance costs vary, but premiums generally run between 15 cents and $1.50 per $100 of annual sales revenue. Most small business owners pay around $700 per year. General liability insurance includes some product liability coverage, but that may not be enough for some small businesses. That makes working with an insurer like a good idea. The Hartford’s team of small business insurance specialists can evaluate your risk and point you toward the appropriate coverage for your business. How Product Liability Insurance Works Business owners are liable for injury, illness, and property damage caused by the products or services they bring to consumers. In most states, any business in the supply chain can be held responsible for the harm its goods or services cause. That means retailers, designers, wholesalers, manufacturers, and distributors can all be sued for: Design defects: When the initial design causes an entire product line to be inherently dangerous, like a top-heavy car that consistently flips over on turns Manufacturing flaws: When a flaw in production creates a defect in a product that then causes injury or damage; an example might be a swing set with a loose or weakened chain Defective instructions or warnings: When inadequate or unclear instructions cause an injury, such as a cleaning solution that emits chemical fumes and does not give directions to use in a ventilated area Product liability insurance covers these lawsuits as well as completed business operations that occur off-premises. For example, if a carpenter finishes hanging kitchen cabinets that later fall and cause damage, product liability insurance typically pays for the repairs. All of these risks are also covered in a portion of general liability called products-completed operations coverage, but a business with greater risk like a manufacturer may need a standalone policy. Product Liability Insurance Costs Product liability insurance is usually about 25 cents per $100 in sales revenue. For example, if you sell $1 million worth of goods per year, your product liability insurance costs might be $2,500 (or 0.0025 x $1 million / $100). Your actual costs, however, depend largely on your industry and the product you bring to consumers. If you’re in a riskier industry like biotech, then you can expect to pay closer to $10,000 per $1 million in sales (or 0.01 x $1 million / $100). Product Liability Insurance Costs Factors The cost of product liability insurance varies greatly depending on the risk categorization of your product. These can depend on the size of your product, how it’s marketed, its safety features, and the size of your distribution. Items like fireworks and firearms will have a higher risk factor than fuzzy slippers and yoga mats. Other factors that determine product liability insurance cost include: Industries: Not only are some products riskier than others, but certain industries face high standards and more lawsuits than others, so they often pay higher product liability premiums Location: Carriers price insurance based on state insurance regulations and typical loss exposure Revenue: Annual revenue defines the overall liability lawsuit exposure a company faces and impacts the amounts awarded by courts Claim history: A company or product with a history of claims generally indicates a greater risk for the insurer Coverage limits: Policies start with limits as low as $100,000 but can exceed tens of millions of dollars for protection; higher coverage means more exposure for the insurer, so premiums are higher The Cost of Not Getting Product Liability Insurance Business owners who need standalone product liability insurance may balk at the extra expense. Before you decide to forgo the coverage, you might want to consider what you could pay if you’re hit with a product liability lawsuit. The most recent data from the Insurance Information Institute shows the average product liability award is $1.5 million. One way to find affordable product liability insurance is to work with a broker. Online brokers like  typically send you offers from multiple carriers via a single application. This makes comparing coverage terms and premiums much easier. Plus, CoverWallet has insurance professionals who can help you evaluate and decide. Product Liability Coverage Details Product liability insurance can vary from carrier to carrier. Any business owner considering a standalone product liability policy should get familiar with some of the details listed below to make sure their risks are appropriately covered. Common Exclusions Product liability has several exclusions that create reasons for carriers to deny claims or choose not to renew your policy. Five common exclusions specific to product liability insurance include: Quality control exclusion: Product liability insurance carriers require that manufacturers and distributors maintain quality control standards to ensure products are safe for consumers Reporting exclusion: Failure to report new manufacturing methods, products, materials, or ingredients can mean your policy doesn’t cover your product Efficacy exclusion: Your insurer may deny a claim if your product fails to perform its main function Material exclusions: Many carriers do not cover certain materials or ingredients; selling or manufacturing a product that contains a forbidden material or ingredient means your policy doesn’t cover it Product recalls: Most product liability policies don’t cover costs associated with the withdrawal, inspection, repair, replacement, or loss of use of an insured’s product if it’s recalled You want to always talk to your carrier when you add products or change production methods, materials, or designs on current products. Doing so can save you a lot of headaches should you be hit with a product liability lawsuit. Claims-made vs Occurrence Product Liability Insurance Product liability can be written on a claims-made or an occurrence basis. Claims-made policies only pay if both the triggering event and the claim filing happens while the policy is in force. Most claims-made policies include prior acts coverage for triggering events that occur before the policy starts. Without this coverage, events that cause damage before you buy your policy would be denied, even if you only learn about them during the life of the policy. The second option is an occurrence policy that pays any covered claim as long as the triggering event occurs during the life of the policy. As a result, occurrence policies tend to be more expensive than claims-made policies because the insurer has to pay claims even after the policy has ended. Product Recall vs Product Liability Insurance As we said, recalls are usually excluded from product liability coverage and require product recall insurance. A product recall policy generally covers the business’ financial loss in a recall, such as: Reimbursement payments Shipping costs Product testing Customer notification Employee overtime A company working in an industry where product recalls could affect millions of people―safety products, electronics, or food items―should consider getting product recall coverage in addition to product liability insurance. Vendor Coverage Rider for Retail Product Liability Instead of buying a standalone product liability policy, retailers may want to ask whether distributors or manufacturers of the products they sell offer vendor coverage. Vendor coverage is an endorsement to the manufacturer’s or distributor’s policy that extends coverage down the supply chain to retail sellers. A retailer who wants to take advantage of this rider should request a certificate of insurance (COI) as proof that the other business owner has product liability insurance. Not all suppliers offer it. Top Product Liability Insurance Providers Small business owners with low product liability risk, like many retailers, should look to top insurance providers who offer comprehensive general liability policies and business owner’s policies (BOPs). However, manufacturers and designers may need to work with surplus lines brokers to get a standalone product liability policy, especially if the products they work with pose great risks, such as firearms and consumable goods. The Hartford is a good fit for small business owners whose risks can be covered sufficiently with the products-completed operations coverage found in a business owner’s policy (BOP). The Hartford’s can be written on a claims-made basis with prior acts endorsements to cover incidents occurring before the policy’s start date while still being some of the most competitively priced BOPs on the market. Its minimum annual premium is $250, or slightly more than $20 per month. CoverWallet As an online insurance broker,  works with top-rated carriers and is a great fit for new businesses that have no previous product liability exposure. These policies tend to be more expensive, and CoverWallet can shop these policies among multiple top providers to find the best price for new companies that don’t yet have a track record of product sales. Additionally, the company has an easy application that simplifies and speeds up the entire insurance purchasing process. Insurance Canopy is a specialty insurance provider that can place difficult-to-insure businesses, particularly cannabis industry companies that have significant exposure from the sale or manufacturing or hemp-based and cannabidiol (CBD) items, including ingestible and topical products. Business owners can add product liability riders to policies or purchase standalone policies on a claims-made or occurrence basis. AIG is a good choice for businesses that face a high likelihood of product recalls like those involved with child safety products, lithium-ion batteries, auto parts, or vitamin supplements. The company offers product liability and contaminated product insurance as well as a product recall policy that can cover your business’s responsibility to third parties. Nationwide is a good fit for vendors, concessionaires, and exhibitors who aren’t involved in manufacturing the products it sells. These often have some protection through the product liability insurance found higher up in the supply chain but still need to cover themselves from being attached to lawsuits. Nationwide works with specialty carrier K&K Insurance to bring vendors short-term general liability with product liability coverage that doesn’t limit the number of events you can attend. Bottom Line Product liability insurance offers important liability protection if your business manufactures, distributes, sells, or repairs products. Product insurance protects against claims and lawsuits where judgments can be in the millions. Protect your business against the expense of defending claims if a product malfunctions or has a design flaw. One product liability claim can bankrupt a company that isn’t prepared with product liability insurance. It is easy to get a quote that covers liability before you realized you needed it with The Hartford. Visit  to see how it can cover your business and get a quote in just 20 minutes.

Garage liability insurance is a policy that auto repair shops, dealerships, tow truck drivers, and service stations need. It covers third-party bodily injury and property damage caused by garage operations as well as vehicles in the business’s care, custody, or control. The annual cost of garage liability insurance typically starts between $1,000 to $2,000 annually. Providers like make getting garage liability insurance for your small business easy with online quotes and experts available to provide individual guidance and make sure you are protected properly. Complete a free, no-obligation questionnaire online and get covered in minutes. How Garage Liability Insurance Works Garage liability covers claims similar to general liability insurance, namely injuries and property damage that your business operations cause to people who aren’t employees. However, garage liability specifically covers incidents caused by garage operations like a mechanic test driving a customer’s car. If the mechanic hits another vehicle, garage liability pays for the damage to that vehicle. Unfortunately, the customer’s car is not covered. For that, you need garagekeepers coverage. Insurers who offer garage insurance can usually endorse the policy so that it includes coverage found in general liability like personal and advertising injury. This can be a convenient way for business owners in the automotive industry to get their fundamental exposures covered through a single policy. What Garage Liability Insurance Covers Garage liability insurance covers allegations made by nonemployees that your garage operations, whether necessary or incidental to your garage business, caused them harm. For example, garage liability insurance is typically triggered by: Bodily injury: A vendor’s medical bills after she breaks her leg falling into the service bay Property damage: A customer’s repair bills after a hydraulic lift smashes his laptop Products and completed operations: A customer’s medical and repair bills after a mechanic fails to tighten the lug nuts when changing her tire This coverage extends to the person or business named on the policy, called the named insured, plus the named insured’s employees, partners, directors, and shareholders as long as they are acting within the scope of their duties. What Garage Liability Insurance Doesn’t Cover Perhaps the most important exclusion in garage insurance is the one for damage to vehicles under the care, custody, or control of the business. This means a customer’s claim that his vehicle was damaged or stolen while it was kept at your business is not covered. Remember the example of the mechanic causing an accident while test driving a customer’s car? Because the mechanic was in control of the customer’s car, garage liability insurance usually doesn’t pay for its damages. Other common garage insurance exclusions are: Injuries to employees Damage and injury caused by pollution Product recall costs Professional or organized racing or demolition activities Garage Liability Insurance vs Garagekeepers Coverage Garagekeepers insurance is an optional coverage designed for businesses that keep customers’ vehicles on their lots. It essentially covers what garage liability excludes, autos in the business’ care, custody, or control, by paying for repairs when those vehicles are damaged, lost, or stolen. Garagekeepers insurance covers damage caused by: Theft Fire Vandalism Extreme weather Collision Typically, garagekeepers liability insurance only covers damage to or theft of the vehicle itself, not the contents. You can, however, add endorsements to include items left in the car. Who Needs Garage Liability Insurance Garage liability, sometimes called auto repair shop insurance, extends beyond repair facilities. The policy is appropriate for any automotive business because it covers damages and injuries related to garage operations whether or not a vehicle was involved. Small businesses that typically need garage liability insurance include: Auto body shops Auto repair shops Service stations Auto glass installers Emissions testing centers Oil change and lube shops Detailers Tow truck operators Parking garages Car dealerships Any business working on or with vehicles needs to have garage liability insurance. Some businesses are required to carry coverage to get licensed but, even when it’s not mandated, garage liability insurance is a smart investment to guard against accidents turning into financial disasters. Additional Types of Garage Insurance Every small business faces multiple exposures. At the very least, any business in the automotive industry should have garage liability, plus garagekeepers coverage if customers leave vehicles with them. However, businesses may also face risks like property damage and employee injury, and these require other insurance policies, such as: Workers’ compensation insurance: Pays for your employees’ medical bills and loss of income when they’re injured on the job, like a mechanic severing a finger in a winch. Commercial auto insurance: Covers third-party property damage and bodily injury when you or your employees cause accidents. Commercial umbrella insurance: Extends the limits on underlying liability policies, including garage liability and commercial auto; usually a more cost-effective option than adding additional coverage on your liability policies. Garage Insurance Costs Annual garage liability insurance costs typically fall between $1,000 and $3,500. This is significantly more than general liability, but that’s because garage insurance covers businesses that face much more risk than most. Moreover, garage owners usually need other business insurance policies like garagekeepers insurance and workers’ compensation. This can increase your total annual costs to between $2,000 to $6,000. Typical Garage Insurance Costs & Deductible by Policy Your location, specific operations, business revenue, and number of employees are just a few of the factors that impact the cost of garage insurance. To keep costs down, you may want to look for a carrier that can add garage liability and garagekeepers insurance to a business owner’s policy (BOP). BOPs typically combine general liability with business property for small business owners, so adding garage liability means automotive businesses can get their fundamental coverage from a single carrier. Top Garage Liability Insurance Providers *Liberty Mutual quote provided by our partner Commercialinsurance.NET. Not every insurance carrier offers garage general liability, so businesses in the automotive industry may have the best luck going to a top business insurance broker. This way, they can access multiple carriers that write garage liability policies and compare offers. CoverWallet is a great choice for garage owners and auto businesses of all stripes. The insurance partners CoverWallet works with are capable of handling the high dollar value of a thousand cars on a lot or a customer’s injuries after slipping in an oil slick. Plus, CoverWallet lets garage owners easily compare policies online so that they can see how much each insurance carrier charges and weigh the cost against the policy terms. Farmers is a national carrier specializing in small business insurance, and it is a good option for auto repair shops with multiple locations. It can provide coverage for cars stored on-premises or being worked on at another location. Agents at Farmers are available for policyholders seeking better solutions for safety and loss mitigation, which helps keep premiums low. CyberPolicy is ideal for garage owners who need to cover equipment damage, botched repairs, and even personal injuries. As an online broker, CyberPolicy can connect you to a variety of insurance providers that offer policies to cover every risk. Their online application is fast and easy, but you can also speak with a representative who can help you find garage liability plus the other policies you may need. Progressive Commercial While is a leading business auto insurance provider, the carrier also offers several key coverages for tow and impound lots, including garagekeepers legal liability, on-hook towing, and garage insurance. Additionally, tow lot owners who get commercial auto and have general liability or a BOP can earn a discount of up to 15% even if their commercial auto isn’t written through Progressive Commercial. Liberty Mutual is a well-known brand that offers garage insurance policies to auto dismantlers, salvage yards, and “U-Pull-It” companies. The carrier partners with Watson Insurance Agency to bring these hard-to-cover business owners garage liability, commercial auto, general liability, property, and garagekeepers insurance. Moreover, policyholders can take advantage of safety resources, including access to a safety consultant, to help minimize claims and keep costs down. *Liberty Mutual quote provided by our partner Commercialinsurance.net. Garage Insurance Frequently Asked Questions (FAQs) Buying insurance to protect your business is not always easy, especially if you don’t know what to look for. Below are answers to some of the most commonly asked questions about garage liability insurance. Is a mechanic liable for damages from repairs? Mechanics are liable for damage resulting from incorrectly done repairs. Auto services companies are expected to perform duties professionally so that cars are functional and safe. If faulty workmanship results in property damage or injury, garage liability insurance most likely covers repair costs and medical bills. However, it does not cover the work itself. For example, say a mechanic improperly patches a tire. The owner drives the car and suffers a blow out that causes him to run into another car. The owner’s hospital bills and the other car’s repairs typically are covered by garage liability. The mechanic, however, is responsible for replacing the customer’s tire. What happens if a garage damages your car? A car in the care, custody, and control of an auto shop is the responsibility of the auto shop. Garages can get a garage liability policy with garagekeepers coverage to pay for claims over accidental damage to cars in their care. Claims on these policies include loss due to perils, such as theft, vandalism, or fire. Do auto dealers have insurance? Auto dealers typically need the same insurance other businesses need like commercial property, general liability, and workers’ comp. However, most also require garage liability and garagekeepers insurance. Dealers with open lots may also need coverage for wind and hail damage. Bottom Line Garage liability insurance is an essential policy for businesses in the automotive industry because it protects them if someone claims their garage operations caused injury or property damage. However, business owners often need additional coverage, such as garagekeepers, to pay for damage to customers' vehicles left in their care. makes it easy to combine these two essential policies into one with its garage business owner’s policy. In five minutes, garage owners can get a competitive quote that covers the biggest risks and includes business interruption coverage, all combined into one easy-to-understand policy.

Insurance endorsements, sometimes called insurance riders, are legally binding amendments that change the coverage provided in a policy. They can broaden, restrict, or otherwise alter coverage and usually be added at any point during the policy term. Getting an endorsement allows policyholders to customize their insurance for a small added cost. How Insurance Endorsements Work Many insurance policies are written on standardized forms that cover the most common risks policyholders face. When policyholders need something different from the standard coverage, they can have their policies endorsed, or altered. An insurance endorsement is a form that explains the coverage changes you and your insurer have agreed to. These changes include: Adding coverage: Adding coverage, such as endorsing hired and nonowned auto insurance to a general liability policy, is one of the most common reasons policyholders request endorsements. Restricting coverage: Insurers sometimes endorse policies to eliminate coverage for specific events. For instance, many carriers add an endorsement so that they don’t have to cover bodily injury or property damage caused by asbestos. Naming additional insureds: An additional insured endorsement extends some coverage provided in a policy to people who weren’t included originally. Business owners often get these endorsements when a company they’ve contracted with requests it. Clarifying policy language: A grammatical error or omitted word can impact the meaning of an insurance contract, so insurers may use an endorsement to make sure the policy’s intent is clear. Changing coverage limits: Policyholders can request higher or lower limits and sublimits to protect their assets better. On some policies, they can also ask for adjustments to their deductibles. Updating policyholder information: Endorsements are sometimes necessary to change information about the insured, such as her mailing address. The majority of insurance endorsements are voluntary, meaning either your or your insurer opted for the change. For example, you may want to extend your liability coverage to a client, so you get an additional insured endorsement. On the other hand, your insurer may choose to limit its liability on a policy by restricting coverage, like excluding damage from hailstorms on a property policy. Endorsements can also be mandatory. Most of the time, this is because the standard policy form does not conform to state law like when a policy’s cancellation clause does not provide the same amount of notice that the state requires. In that case, an endorsement to extend the notification period is mandatory. Common Insurance Endorsements Anyone whose insurance needs don’t fit the standard coverage forms or whose needs change while a policy is in force may need an endorsement. This includes business owners as well as individuals who have purchased homeowners’ or life insurance policies. Below are some of the more common insurance endorsements for each category. Small Business Insurance Endorsements Small business owners typically use endorsements to cover gaps or increase coverage to make sure they’re protected properly. In some cases, the endorsements listed below can be purchased as standalone policies. That’s more common when a business owner has significant risk and needs more coverage. Inland marine: Extends coverage to business property when it’s stored at a site other than the address listed on the policy or while it’s in transit Equipment breakdown: Pays to repair or replace business equipment damaged by internal malfunctions Business interruption: Covers lost revenues and some operational expenses if you have to pause business operations halt due to a covered claim; most small business owners get this coverage in a business owner’s policy (BOP) Communicable disease rider: Adds business interruption coverage for losses caused by infectious diseases Additional insured: Extends liability coverage to people not named in the policy originally; businesses often request additional insured status when they contract with other companies Additional covered property: Changes a commercial property policy so that it covers property that originally was excluded from coverage Most of the examples listed above broadens coverage to items and situations not included in a policy originally. Remember, however, that endorsements can also be used to increase limits, restrict coverage, and change deductibles. Home Insurance Endorsements Like small business owners, homeowners use riders to increase their coverage when a standard policy is insufficient, like when they need higher limits for valuable property. Some may also need to endorse their liability coverage because of unique activities like running a business out of their homes. Common homeowner’s insurance endorsements include: Scheduled personal property: Home policies typically have a set limit for damaged personal property, and it may not be enough for big-ticket items like jewelry and art. A scheduled personal property endorsement allows you to insure specific items for their full value. Home-based business: Business activities usually are excluded from homeowner’s insurance, but you can often get coverage by adding an endorsement. Water backup and sump overflow: Coverage for water damage is a tricky thing in homeowner’s insurance. Most policies don’t pay for damages caused by public utilities, so many homeowners opt for this endorsement. Animal liability: Some insurers don’t cover injuries and property damage your pet causes to other people while others exclude coverage for certain breeds or animals with a history of misbehaving. Life Insurance Riders Many of the riders that life insurance carriers offer impact how and when their policies’ death benefits pay out. Some of them can be particularly helpful if the insured’s situation changes during the life of the policy, especially if they face medical hardships. Others increase the benefit for certain situations. Some of the most common life insurance riders include: Waiver of premium: Waives required premium payments if the insured can’t work because of a disability Long-term care: Provides monthly payments if the insured require long-term care required Accelerated death benefit: Gives the insured access to the death benefit if he is diagnosed with a terminal disease Accidental death benefit: Pays an additional death benefit if the insured suffers a fatal accident Guaranteed insurability: Allows the insured to buy additional coverage without going through another medical exam Term conversion: Allows the insured to convert a term life policy into permanent insurance at designated policy milestones How to Get an Insurance Endorsement Getting an insurance endorsement is as simple as identifying your risk, discussing your options with your agent, and paying any additional fee. Typically, endorsements are purchased at the start of a policy, but you can also add them midterm or at renewal if your coverage needs change. Because they become part of your legal contract with your insurer, endorsements typically remain in force for the length of your policy. However, you can get an endorsement that only alters your coverage for a limited time, such as extending coverage to a second location temporarily. 3 Tips for Getting Insurance Riders Sometimes, people add riders because they’re inexpensive and sound like a good deal. However, buying coverage you don’t need is a waste. Before you add a bunch of insurance riders and premium to your insurance policies, take the time to review these three tips so that you get coverage appropriate for your situation. 1. Consider Your Risks Situations that aren’t covered by a standard policy are usually less common than the ones that are. Look at what the rider covers, decide if it applies to you, and whether it’s worth the extra cost. An endorsement can make a policy more valuable, but only if it covers a risk you face, and the expense doesn’t outweigh the peace of mind it brings. 2. Ask What Your Other Policies Cover If you have multiple policies, you want to find out what each covers so you can avoid overlaps. For example, some insurers automatically include inland marine coverage in their property policies for certain professions like DJs. If that’s the case for you, then you don’t want to add a similar endorsement to your commercial auto insurance. 3. Learn About Time Frames and Qualifications Some endorsements, especially those for life insurance policies, not only require you to purchase them in a timely fashion but may also have difficult hoops to jump through to get them. Business and home policies often allow you to add endorsements any time prior to a claim. Bottom Line No insurance policy can cover every possible loss scenario, but insurance endorsements can help cover situations that your business or home may have an increased risk for. Review what standard insurance forms cover and seek out only the insurance riders that meet your risk needs. In most cases, you can get the added coverage for pennies on the dollar compared to more expensive policies.

Insurers that issue workers’ compensation insurance audit policies when they expire. They do this because initial premiums are usually based on an estimate of the policyholder’s payroll, and they need the actual payroll to charge the right amount. As a result, workers’ comp audits can be stressful for business owners because they may end up owing money. Preparing for a workers’ comp audit is one way to minimize your stress and, while we can’t list the specific rules for every carrier, we can give you a general idea of what to expect. The following steps can help you get ready, plus you can download a checklist to use when your audit rolls around. 1. Schedule Your Workers’ Comp Audit The first step is to schedule your audit. Typically, your insurer notifies you that it’s time for an audit about six to eight weeks prior to your policy’s expiration date. The type of audit you have to schedule varies by insurer and state, but there are generally two main types: Physical audit: As the name suggests, a physical audit is when your insurer sends an auditor to your business to review records, observe operations, and interview employees. The auditor typically has about 30 days to schedule, complete, and submit your paperwork. Voluntary audit: No one comes to your office for a voluntary audit. Instead, the review is conducted by mail and phone. The insurer sends a form for you to fill out and return within a certain time, often 60 days. If you’re required to have a physical audit, schedule it so you’re available to answer any questions that the auditor might have. That way, you can make sure the auditor understands your operations so that they can classify your business accurately. Other Types of Workers’ Comp Audits Not all workers’ compensation audits occur when policies are set to expire. Depending on their situation, some business owners may have a: Preliminary audit: Your insurer may conduct an on-site preliminary audit when you first apply for workers’ compensation insurance to determine your initial premium. This may be trickier to schedule if you need to get covered quickly to be in compliance. Interim audits: Insurers may require an audit during the life of your workers’ comp policy, particularly if you’ve changed operations. Additionally, employers might ask for interim audits if they want to pay their workers’ comp every quarter. Interim audits are usually done by mail. For both types of audits, you should still receive some sort of notification from your insurer so that you can set time aside for the audit. 2. Gather Your Records Workers’ compensation insurance costs are based on your payroll, risk, and claims history, so the auditor needs information about each of these aspects. Typically, audit notifications spell out the documents the auditor can use to verify the information. This list can be specific to the carrier, but many insurers want some or all of the documents mentioned below. General Information Description of company operations Job descriptions for each employee Number of employees at each location Owners/officers names and titles Description of work performed by contractors and subcontractors Payroll Records Accounting ledger Payroll journal or register Business checkbook Federal Profit and Loss From Business Schedule C (Form 1040)* Federal Employer’s Quarterly Tax Return (Form 941) Federal Employer’s Annual Tax Return (Form 944) Federal Employer’s Annual Unemployment (FUTA) Tax Return (Form 940) Federal 1099, W-2, and W-3 transmittals State unemployment insurance tax reports (forms vary by state) Time cards or number of hours, days, and weeks worked annually Overtime payroll records *For individuals and sole proprietors Cash Disbursements Records Payments made to subcontractors Payments made to independent contractors Payments made to casual laborers Receipts for materials purchased Insurance Records Subcontractors’ certificates of insurance Business’ experience modification worksheet What Is Included in Payroll Your payroll, also referred to as remuneration, is the starting point for your workers’ comp premium, so you want to get that number right when preparing for an audit. However, it’s not always clear what counts as payroll. Each state has its own definition but, in general, remuneration includes: Gross wages and salaries Total commissions Bonuses Pay for overtime, holiday, vacation, and sick days Employee contributions to 401(k)s, savings plans, and individual retirement accounts (IRAs) Payments based on something other than time worked Payments you make that would otherwise be the responsibility of the employee like Social Security Payments or allowances for hand tools or power tools employees use for work Lodging and meals included as part of an employee’s pay What Is Excluded From Payroll Conversely, employee paychecks may include payments that aren’t usually counted as payroll in workers’ comp premium calculations. For example, many states exclude: Tips and gratuities Employer payments to group insurance Severance pay Reimbursed business expenses Special rewards for individual invention or discovery Active military duty pay Uniform allowances Employee discounts on goods and services Make sure to identify these to the auditor, so they are not inadvertently included in your total payroll. Are All Salaries Included in a Workers’ Comp Audit? In general, business owners do not have to carry workers’ compensation insurance for themselves, so their salaries aren’t considered during a workers’ comp audit. However, some states give sole proprietors, corporate officers, partners, and limited liability company (LLC) members the option of getting coverage. When they do, their salaries are treated differently because their pay is often significantly more than regular employees. Most states set an annual wage for sole proprietors and partners that is different from their regular salaries. Somewhat similarly, corporate officers who opt-in on workers’ comp receive a weekly salary that falls somewhere between a maximum and minimum salary determined by the state. LLC members get one or the other, depending on the state’s workers’ compensation rules. 3. Update Your Job Descriptions The risk your employees face in their jobs is another part of calculating your workers’ comp costs so that the auditor will investigate everyone’s duties and your business’s general operations. This may involve reviewing job descriptions you already have, or it could mean completing a form that lists what each employee does. Either way, you should have a strong understanding of what the people who work for you do. A good way to accomplish that is to update your job descriptions—or create them if you haven’t already. Why Job Descriptions Matter in a Workers’ Comp Audit You might be tempted to skip this step, but detailed job descriptions can be a big help in a workers’ comp audit. Accurate job descriptions help your auditor determine the appropriate governing class code for your business. That class code has a corresponding base rate that is used in a formula to determine your costs. Using the wrong class code could mean you’re paying the wrong premium. The basic formula for calculating workers’ compensation insurance costs factors in three numbers: the rate assigned to your class code, your experience modification rate, and your payroll divided by $100. Let’s say, for example, you run a craft beer brewery in Wisconsin with a payroll of $100,000. The auditor assigns your business the class code 2121, which means your base rate is $3.11. To keep things simple, let’s also assume your experience modifier is one, so it doesn’t impact your rate and that there are no other fees or discounts. If all of that is true, then your workers’ comp costs $3,110 per year: However, your auditor may miscalculate your premium if you forget to mention that you also have a clerical employee (class code 8810) who earns $40,000 per year. Clerical employees are an example of standard exception classes. These classes aren’t included in the governing class code and get rated separately. The base rate for your clerical worker is 20 cents, so the employee only costs $80 to insure each year: Ultimately, your workers’ comp bill should look like this: When you rate the office employee differently than the rest of the staff, your overall insurance costs go down. Having this information on hand during your audit helps the auditor assess your premium accurately. 4. Review the Auditor’s Work Once your audit is complete, review the auditor’s work to make sure his information matches your understanding of your business’s payroll and operations. Essential information to review includes: Payroll data: Check that your audited payroll matches the payroll from your accountant or accounting department. Governing classification: Unless your operations have gone through a massive overhaul, your governing classification should match the one on your original workers’ comp policy. Any additional classifications: If your state allows them, check whether standard exception classes have been noted. The same goes for construction businesses that get to use multiple class codes for individual workers. Experience modifier: Most states prohibit insurers from changing your experience modification rate during the policy term. If the auditor changes yours, you should ask why. Once you review the auditor’s work, sign any paperwork the auditor requires to indicate you’ve taken part and understand the results. This step may not be available to you if you completed the audit remotely, but your insurer should send you a summary of the auditor’s findings. If those results seem out of whack, you can request more information from your insurer. How to Dispute a Workers’ Comp Audit If you don’t have to pay any additional premium―or maybe even received a refund―you can relax until next year’s audit. However, your insurer might decide you paid too little and send you a bill. In that case, you either need to write a check or dispute the audit. Each carrier has its own rules for disputing a workers’ compensation audit. However, most insurers expect employers to file a dispute in writing within a set time, so you should contact your carrier immediately. Most likely, your carrier will want details on why you think your bill is incorrect and an estimate of what you think it should be. You won’t have to pay the additional premium while your insurer evaluates your complaint, but you may be required to pay any undisputed portion by the due date on the audit bill. Common Mistakes in Workers’ Compensation Audits Being charged an additional premium doesn’t automatically mean the auditor made a mistake. Workers’ compensation premiums are complicated things, so mistakes are pretty common. Below are a few of the most common errors: Including items in payroll that shouldn’t be there Using the wrong class codes for employees Changing your experience modifier Charging for an insured subcontractor Including exempt workers in payroll How to Make a Workers’ Comp Audit Easier Every company that issues workers’ compensation insurance reviews policies at the end of their terms, so you can’t avoid an audit. However, you can make the audit process easier if you opt for pay-as-you-go workers’ compensation. Pay-as-you-go workers’ comp is a payment plan where your insurer charges you each time you run payroll. This usually requires you to upload or enter your payroll information to the insurer’s platform manually. However, some payroll companies can integrate with your insurer to upload your data and pay your premium automatically. The big selling point here is that a pay-as-you-go plan means your workers’ compensation premium is more accurate. Your insurer still needs to audit your policy because there could be errors in classifications or remuneration but pay-as-you-go plans generally result in smaller premium adjustments. Workers’ Comp Audit Frequently Asked Questions (FAQs) The stress of a workers’ comp premium audit can create additional questions for small business owners, especially if they hope to avoid one or are concerned that they’ll be asked to pay a huge premium one theirs is over. We answer a few of those questions below. Am I required to undergo a workers’ comp audit? Almost all workers’ compensation insurance policies have language that makes the audit a requirement for the policyholder. The policy created by the National Council of Compensation Insurers (NCCI), used in most states, says the policyholder must allow an audit anytime within three years of the policy’s expiration date. What happens if I don’t comply with a workers’ compensation audit? If you choose not to comply with your insurer’s request for an audit, it could cancel your premium, which can make it difficult to get a policy later on. Moreover, state law may allow your insurer to fine you—sometimes up to 300% of the original premium—and send your account to collections. Ultimately, your insurer can sue to collect both the original bill and the additional fines. What if I can’t afford the retroactive premium audit bill? Premium audit bills result from unanticipated payroll during the course of a year and generally are due upon receipt or within 30 days. If the bill is substantial, contact your insurance carrier’s billing department. Most carriers will set up a payment plan, often splitting the bill over three payments. Ask the billing department for your options. Bottom Line Understanding the workers’ compensation audit rules when preparing for your annual review makes the process easier and produces more accurate results. By having well-organized company files and payroll data, a small business owner helps the auditor get a clear picture of the company’s operations while also minimizing her own stress.