Customers don’t usually like surprises, especially when they come in the form of additional premiums after a policy has expired. Failure to disclose the auditable nature of a policy, or purposely understating a basis of premium at the beginning of a policy can lead to E&O claims.
Audits can create E&O exposures when the client is surprised to learn that they owe large amounts for a policy that has already expired. Audit problems usually involve General Liability or Workers’ Compensation policies.
There are many reasons that this may occur. Original estimates may have been based on a conservative view of the future and the insured’s business may have expanded beyond expectations. This is great news for the client! When delivering audits under these circumstances, agents should remind the client that although it means they must pay additional premiums, it is based on the fact that their business did better than expected.
One other reason that audits may produce large additional premiums is when exposures not present at the beginning of the policy are created during the year. The insured may have expanded their operation, begun a new operation, or acquired another firm.
Another problem arises when a client fails to obtain certificates of insurance from subcontractors. Many carriers will require this and may charge the insured as though the subcontractor was an employee.
Regardless of the reason, the agent must notify the client in advance that an audit could result in an additional premium at the end of the period. In addition, every audit should be verified for accuracy (both additional and return premiums). Errors in audits are quite common and they must be corrected immediately to “stop the clock” on the collection of premiums.
In This Section:
Best Practices Ideas for Handling Audits
Sample Letters / Documents / Wording
The Best Practices for Avoiding E&O Claims When Handling Policy Audits
- Advise the insured on the quote or proposal that the policy will be audited (see Sample Letter #1)
- Prominently disclose on the quote or proposal any premiums that are provisional or deposits and subject to adjustment
- Inform clients what will be audited and how they must maintain records to ensure accurate audits
- Obtain copies of the insurer’s audit worksheets to check for accuracy
- Promptly deliver any audit requesting additional premiums—bad news is bad, but late bad news is worse—detailing the terms of payment (See E&O Tip) (See Sample Letter #2)
- Promptly refund any return premiums produced by an audit
- Establish a written procedure for handling policy audits (See Sample Procedures)