Selecting Your Insurance Broker
Evaluating and Renewing Employee Health Insurance Plan
Insulate Your Company from Rising Health Insurance Costs
Service Department Costs
DON’T GET HIT WITH UNEXPECTED INSURANCE PREMIUMS
Many companies have been hit with unexpected additional premium at the expiration of their general liability insurance policy
. Below are the steps to determine if and when a policy will be audited and how to determine the actual earned premium for the policy term.
Steps1. Determine whether the company policy is auditable or not
. Review the declaration
page of the policy for reference to audit basis. If the policy declaration page has
words similar to the following the insured should not experience an unexpected
premium at the end of the policy.
* Audit Period: Non-Auditable
* This premium is subject to adjustment with an audit. Yes or No
* Non-Auditable unless circle one of the following: Monthly, Quarterly ,Semi-Annual or Annual
* Premium is: Auditable or Flat
If the policy declaration page does not contain any similar combination of the above
words then the insured should look within the body of the policy. Common
areas to look at are the Common Policy Conditions, Composite Rate Endorsement, and
Business Owners Common Policy Conditions.
If the policy is auditable, as many are for bigger businesses, then the insured should
proceed to step two.
2. Once the insured knows the policy is auditable they will need to know how the
original premium was calculated.
The policy premium calculation starts with the insurance carrier classifying the
business. Contracting, retail, manufacturing, and building owners are
four main classes of business. Once the insurance carrier determines the class of
business, they will know what premium base to use. The four main premium bases
are gross sales, payroll, area, or number of units. This premium base is then
multiplied by a dollar rate that the insurance industry or the carrier assigns that class
of business. Usually the insured can find this base rate number within the declaration
page, on a rating worksheet, or by asking the agent.
3. Calculation of estimated annual premium.
For example, a retail store’s premium base is $1,000 per gross sales.
If the dollar rate were $.50 per $1,000 of gross sales, the initial premium would be
$50.00 a year.
$100,000/$1,000 * .50 = $50.00 would be the estimated premium for the year.
4. Calculation of the unexpected premium.
If the insured knows or believes sales, units, area will be greater than the insurance
carrier based the initial premium upon, the insured should prepare for added
general liability premium costs.
For example, if the insured is expecting $500,000 in total annual sales rather than
$100,000, the added premium would be as follows:
$400,000/$1,000 * .50 = $200.00 added premium. Now if the insured added a
couple of zeros to the equation with either sales or rates the insured could see
a large balance owed at the end of the policy term. Knowing whether the general
liability premium is auditable could save the insured a significant amount in
unexpected premium at the end of the policy.
5. If the premium base (estimated sales, units, area, etc. . . .)
is not in line with the
initial premium charged the insured needs to calculate the correct
annual premium and let the carrier know. The sooner the better.
There are a couple of reasons to let the insurance carrier know. The first is so the
insured can adjust cash flow and either start paying more premium now or be
prepared at audit time to pay immediately. The second reason to let the carrier
know earlier is that sometimes the insured is able to get a lower rate than what will
probably be charged at expiration.
As always, it is best to avoid the unexpected surprises by thoroughly evaluating the
general liability premium with the agent either before binding the policy or when
they deliver the policy to your office.