What Is a General Liability Insurance Audit?

Seep Gupta

04 Feb, 2023

Before buying any insurance policy, one needs to check everything regarding the premium amount, extent of coverage and terms and conditions. Auditing the insurance is important to analyze and scrutinize the various parts of an insurance claim. These include analyzing the insurance documents, its financial statements, risk evaluation, assessment of the liabilities etc. This article gives an overview of the general liability insurance audit.

What is General Liability Insurance Audit

As the name suggests, an insurance audit is the assessment and evaluation of financial statements and liabilities of the insurance companies. It’s the proper examination of everything related to the insurance claim, like risk and liabilities evaluation, liability procedures etc.

While on the other hand, a general liability insurance audit is the audit of business payroll, expenses and risks exposure associated with it. It is usually done by a professional auditor. Evaluation of the financial statements and payroll records of the policyholder is necessary to determine that the policy represents the accurate rating of the company’s exposure to liability.

Need for Auditing General Liability Insurance

Auditing general liability insurance is necessary to determine the right insurance policy^[1] which is needed for your business according to the vision and customized needs of your business. It also helps in determining the appropriate coverage amount according to the type and size of your business because every business has different needs.

This audit also tells where there’s a need to adjust the premium amount or if the policy requires deductibles or out-of-pocket expenses.

Purpose of Such Audits

As discussed above, the main purpose of auditing general liability insurance is the evaluation and assessment of the risks associated with insurance policy claims. But initially, it is a very tough and arduous task to determine the accurate payroll and revenue during the start of a premium year; that’s why an audit sometimes takes time during the start. For conducting this audit, the auditor will first look at the payroll and financial statements of the company of previous financial years, and he will take into account the number of employees a company has fired or hired in the organization during the previous financial years.

One thing important to keep in mind is that not every liability insurance policy can be audited. Audits are generally conducted on general liability, liquor liability and on workers’ compensation policies. Types of policies which can be audited do not depend on a single factor. There are multiple factors which determine whether an insurance policy can be audited or not. These factors include but are not limited to how old a company or an organization is, the type of the company, whether a company or an organization is conducting a business that operates in high-risk industries etc. These are some of the factors that define whether a particular insurance policy can be audited or not.

Formats of General Liability Insurance Audit

General liability insurance audit can be done in many types or via several pathways. These are discussed below:-

• Telephone – Audit can be done via telephonic way also. Under this type, a telephonic appointment is scheduled beforehand to gather and collect all the important data pertaining to the financial statements of the company. This call can last for an average of 45 minutes.
• Mail – In this type, a formal email is sent to the organization by the insurance company containing a series of questionnaire that needs to be filled out within the stipulated time period and should be submitted along with the financial documents of the company.
• Via Electronic Way – This type of audit is done online on the internet via an online portal where a company is generally asked to submit its financial documents online.
• In-Person – This is one of the most conventional ways of conducting audits. In this way, a professional auditor will review all the paperwork and important documents of the company and will also perform a walk-through of the establishment. This type of audit generally takes a couple of hours.

Preparation

Following is the ways in which auditors and organizations can prepare before doing or conducting a general liability insurance audit. These are mentioned below:-

• Small businesses or organizations can prepare for a general liability insurance audit by having their financial statements and insurance documentation ready beforehand for the auditor.
• These documents are very necessary, and they will help the auditors to determine the insurance coverage and whether the current insurance policies are sufficient or best suited according to the growing needs of the businesses. Small businesses are very dynamic in an ever-changing environment and are prone to risks and vulnerabilities, that’s why they need periodical audits during the initial years.
• A business’s or an organization’s financial statements are also necessary to prepare for the general liability insurance audit. Before conducting any type of audit, it is highly mandatory to ask for the insurance company’s permission.
• After receiving the audit request, an audit form needs to be filled out and submitted along with copies of the company’s financial documents to the insurance company.
• For conducting a successful general liability insurance audit, the company is required to provide documents other than financial documents too, such as payroll data, annual revenues, growth tax return and lease data, also if a person operates a business at multiple locations.
• Before conducting any audit, the company will get the audit notice one or three months prior to the end of the company’s policy term. It is important for the company to accept and comply with the audit request to avoid any type of interruption to the company’s insurance coverage.

Process

The process for conducting this type of audit is not that arduous or complicated. Given below is the process in brief:-

• For conducting the audit, the auditor will first access and examine the company’s financial statements and payrolls.
• The auditor will also see and check the company’s records to see if they have the proper employee classifications. This will help him in determining the risk or exposure related to each category of employee working in the company.
• After successfully analyzing and assessing the company’s documents, financial statements and payrolls, he will fill out the audit form and will submit all the important documents to the insurance company.

Benefits

There are several benefits of the general liability insurance audit. These are given below:-

• It helps in maximizing the benefits of insurance policies because it helps in identifying whether the company needs to upgrade its current existing insurance policy to meet the demands of the company in the best possible manner
• It also helps in determining the appropriate coverage amount according to the type and size of your business because every business has different needs.
• It also tells where there’s a need to adjust the premium amount of the policy or if the policy requires deductibles or out-of-pocket expenses.

Conclusion

This article talks about general liability insurance audits. It also talks about how a company can successfully conduct an audit and what’s the purpose and needs behind conducting such type of audit. Finally, we can conclude that before conducting the insurance audit, preparation is really crucial to avoid any mistakes.

Read Our Article: Procedure for Registration of Indian Insurance Companies under IRDAI Regulations