PREMIUM AUDITS

PREMIUM AUDITS

Recently, I received a letter from a dealer that my agency has insured for over twenty years. Not only is he a good customer, he is a good friend, but I thought both of those things were in jeopardy when I read his note:

“Dear Ann, I appreciate the relationship we have had over the last twenty plus years, but I do not appreciate the audit results. I am going to pay the required amount, but next year, I will be looking for a new insurance agency. Thank you, Dan Keetch. Keetch Motors Inc”

Before I even found his file or reviewed the records, I placed a call to Dan. He was pleasant as he explained he’d just had it with fees and taxes and every other additional charge that have become too prevalent in the life of the Texas Independent Auto dealer. He had reached the point of having to make a stand and say, “No more for me, please.”

He and I discussed his used car operation and how garage liability premiums are developed. We agreed as to how his policy should have been rated at the time the contract was written. On the surface, it appeared no additional premium should be due. I suggested that I return his check until such time as I could review the initial rating, visit with the underwriter and discuss the audit figures with the insurance company. In the end, no additional premium was due, the audit was reversed and both Dan and I are happy again.

However, this experience reminded me that many dealers are not completely aware of the rating structure for garage liability premiums, and why should they be? They are in the business of selling cars, while it is the insurance agents’ responsibility to rate the contracts correctly. Nevertheless, a better understanding of the rating procedure could save dealers a lot of stress, time and possibly money.

All insurance companies do not conduct premium audits. In fact, there was time that, other than the admitted carriers, premium audits were virtually unheard of for Texas Independent Auto Dealers. Not all admitted carriers conducted audits, and those who did, often used voluntary audit forms for policies with annual premiums less than $7,500 to $10,000. With a voluntary audit form, the dealer received a request for a list of employees to include hours worked and job titles. When the company got this form back, they compared it to the rating used on the initial policy. Any additional premium generated was billed, while return premiums were paid. Voluntary forms usually went via the agent’s office, encouraging a discussion between the insured and his agent to be sure everyone was fully informed.

Not so today! Many non-admitted carriers not only conduct premium audits on every garage liability policy, they use outside auditors to perform the audits at the dealers’ places of business. In addition, a large number of the non-admitted contracts include an endorsement that allows for collection of any additional premium resulting from the audit, but prevents return of any over-payment.

I want to be clear that most liability contracts, whether general liability, or liquor, or whatever, are subject to audit to determine if the coverage has been properly rated. The insurance companies are not doing anything underhanded or illegal, just unfamiliar to many Texas used car dealers. Most admitted garage policies, and numerous non-admitted ones, provide coverage for new hires, whether reported or not, and therefore conduct an audit to be sure they are appropriately compensated for the risk they’ve taken. Of course, a claim during the policy term involving a non-reported employee or family member could place the coverage at risk, or at the least, create a mid-term additional premium due.

A misconception among many Texas independent dealers is that they need only report employees who drive autos. Office workers, porters, detail guys, etc are also an integral part of the premium development. Non-drivers produce a lower rate, but still result in a premium charge. Family members who drive dealer-owned autos need to be listed, whether they are furnished autos or act as contract drivers.

To give you some idea as to how a policy is rated, let’s pretend that one rating unit is $500. The operation consists of an owner, one salesman, a porter, non-employee spouse over twenty-five, a part-time office clerk, and an eighteen year-old son. The owner, the non-employee spouse, and the eighteen year-old son are all furnished autos. Using the standard rating procedure, 4.25 rating units are generated and produce an annual base premium of $2,125. If the dealer neglected to mention the part-time office worker and the porter because neither drive dealer-owned vehicles, the collected base premium would be $1,825. The completed audit would result in a bill for $300 to cover the employees initially unreported.

The additional $300 would be billed IF the audit was completed correctly, and probably the renewal policy premium would be increased by the same amount. Sometimes, the insurance auditors are unfamiliar with used car operations and dealers in general. The following scene is not a far-out exaggeration:

Auditor: “Mr. Dealer, how many salesmen do you have?”

Dealer: “Just myself and Bill.”

Auditor: “So, your office clerk would never sell a car?”

Dealer: “We all sell cars here. My dad comes down a couple of times month just to visit, but he might sell a car. We’re in the business of selling cars.”

That $300 additional premium just became $1,000 because the rating units changed and a new part time employee was added.

The bottom line is: When your agent asks for your employee list, give him the complete list of people involved in your used car operation, including part-time office workers, non-employee family members and regularly used contract drivers. Be sure there is an understanding between you and your agent as to what every person does so the policy is properly rated up front. Place a copy of that list in your insurance file, and if you add or delete employees, notify your agent AND note it on your list. Then if an auditor comes calling, you’ll know what information the company is trying to verify. Answer the auditor’s questions honestly and succinctly. She doesn’t need to know that your brother-in-law stops by your lot every once in awhile and might bring someone with him to look at car. He’s not “selling” cars. He’s not on your payroll. He has another job and he’s acting only as a friend. Don’t give the auditor an opportunity to become confused.

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HAPPY THANKSGIVING TO YOU AND YOUR FAMILIY! Writing this column is a fun experience, and I am blessed by it. I appreciate you! annmullen@mulleninsurance.com or www.mulleninsurance.com.

Ann Mullen-Martin, President, Mullen Insurance Agency Inc.