What does an insurance policy being auditable mean?

Auditable insurance policies means the premium listed on your policy is estimated and won't be finalized until an audit at the end of the term.

All insurance policies are based on certain ratable elements. Those are the key pieces of information that determine how much you pay. For property insurance, the cost is based on the total insured value. It may even be printed on your policy in cost per $100 of insured property value. If you buy a new building, under most policies you have to schedule the building, pay and additional premium, and the insurance company raises your limit.

You don’t notify the insurance company, and there might not be coverage. But it doesn’t work like that with liability insurance. On a general liability policy or a workers compensation policy, the carrier agrees to defend you against claims. They rated you at the beginning of the policy on payroll or possibly gross sales. You pay a premium based on the estimated sales or payroll at that time. If you sell more goods, or hire more staff, you aren’t required to call the insurance company and list them on your policy. Clients and staff names aren’t listed on a normal liability policy or workers compensation policy, anyway.

But what if the business shrinks over the year? Well, with an audit at the end of the policy term some of the premium can be returned. If the business had more sales than estimated or more payroll, then the insurance company had more risk then they anticipated. In that case a bill is generated and additional premium due.

All workers compensation is auditable. Some general liability is auditable, particularly contractors, wholesale, and manufacturing. Professional liability and executive liability (directors & officers, employment practices & fiduciary) is never auditable. Check your policy, so you know what’s coming. And if your business is growing, ask your agent if you can get a non-auditable general liability policy. You could save a lot of money.