Product Liability Premium Audit FAQ and Advice

1. What is a product liability premium audit?

A: Approximately one month after your product liability policy expiration, the auditor from your insurance carrier will either visit you in person or will place a phone call to review your official records for the time period. The records required may include sales journals, profit & loss statements, general ledger and other computer reports. The information gathered will be used to adjust your premium for the prior policy year.

2. Why is a product liability premium audit necessary?

A: When your product liability policy was issued, your premium was based on your projected sales. At the end of your policy period, an audit is performed to determine what your premium should be based on your company’s actual sales. It stands to reason that companies with high sales and thus more products in the market have a higher risk for a product liability claim. Therefore, if your actual sales are higher than the projected sales, the insurance carrier is entitled to make an additional premium charge.

3. Do I have to provide my sales information to the auditor?

A: Yes. Audits are part of standard insurance practice and it is one of the terms of your product liability contract or policy.

4. What happens if we do not pay the additional audit premium?

A: Three bad things can happen. First, the carrier can cancel your existing policy if you are still insured with them. Second, they can turn the debt over to a collections agency, which can result in litigation against you and/or a ruined credit record. Third, if you attempt to obtain coverage with a new carrier, you must truthfully answer the question on your application that pertains to cancellation of any insurance policy. The new carrier will refuse to provide a quote after they find out that you did not fully pay your prior carrier. On the other hand, if you do not answer the question truthfully on your application, your new carrier can use this as a basis for denying a claim.

5. Why do the insurance carriers not provide refunds if you fall short of your projected sales?

A: Your rate per $1000 of sales is based on your projected sales. The higher your projected sales, the lower the rate per $1,000 of sales that you typically will receive. Insurance carriers do not want to have companies overestimating their sales in order to receive a lower rate and then have to refund the premium based on the lower rate.

The benefits of cooperating with your auditor

In all my years in the insurance business, there is nothing that seems to push a business owner over the edge more than the end of the year premium audit.

But be forewarned: not cooperating with a premium insurance auditor rarely works in a company’s favor. The auditor assigned to conduct the audit  is typically paid by the job and not by the hour. Therefore, the longer you put off the auditor, the more likely the auditor will simply declare your account “uncollectible or uncooperative”.

4 things that may happen if you don’t cooperate

  1. If  the auditor has to come back out to perform the audit, you may find the auditor less patience and unwilling to hash out the small details that could save you money.
  2. The insurance company performing the audit may multiply your previously projected sales by two and send you a bill for the additional premium.
  3. If you renewed your insurance with the same insurance carrier that tried to unsuccessfully audit your business, the insurance carrier may elect to cancel your existing insurance policy.
  4. The insurance carrier will turn the the debt over to a collection agency.

The risks you take when you don’t cooperate

If you are thinking you’ll simply buy insurance from another  company, be aware that most insurance carriers will not want to work with a business that has been non-renewed because of a year end audit. This is a red flag of a problem client and you will likely experience the same problems since sales audits are standard operating procedure in the product liability industry.