Your general liability premium audit is coming

Most contractors know the workers comp audit is coming. Fewer expect the second one.

General liability policies are commonly written on an estimated basis too, and audited at the end of the term against what actually happened. Same principle, different measure — and the same subcontractor problem sits underneath both.

What it is rated on, and why that matters

Workers comp is rated on payroll. General liability for contractors is usually rated on gross receipts or on payroll, depending on the classification and the carrier, and sometimes on other bases for particular operations.

That difference has a practical consequence: on a receipts-rated policy, revenue growth increases your premium directly, and how your revenue is classified changes the rate applied to it. A carrier rating roofing and general handyman work at different rates cares a great deal which bucket your revenue sits in — and if your books report one undifferentiated revenue figure, the auditor has no basis to split it and will generally apply the higher rate to the lot.

This is one of several reasons revenue by category is worth having in the books rather than in someone's head.

Subcontractors are where the money is, again

The single largest finding on both audits is the same one.

If you paid a subcontractor and cannot produce a certificate of insurance showing they carried their own general liability cover for the period they worked, the auditor will typically treat those payments as if the work were done by you — adding them into your rated exposure at your rate.

Three details that catch people out:

• The certificate has to cover the dates worked. One that expired in June does not help for a job in September. Expiry tracking matters as much as collection.
• Carriers frequently require limits at least equal to yours, and some require to be named as an additional insured. A certificate showing lower limits than your policy demands may be treated as no certificate at all.
• The workers comp certificate is not the general liability certificate. They are different coverages. A sub can carry one and not the other, and you need evidence of both.

That last point is why collecting them together, once, at the same moment you collect the W-9, is so much cheaper than assembling them under audit conditions.

What to have ready

• Gross receipts for the policy period, split by the categories the policy rates
• Certificates of insurance for every subcontractor, showing GL cover, the right limits, and the exact dates worked
• Payments to subcontractors by payee — this is the number they will test the certificates against
• Payroll records if any part of the policy is payroll-rated
• A description of the work you actually performed, since classification drives the rate
• Sales or excise taxes collected, if your state's treatment allows those to be excluded from gross receipts

Note the overlap with the workers comp audit and with 1099 filing. Three obligations, one underlying set of records: payments by payee, with documents attached. Build it once and all three become straightforward.

What to do when the notice arrives

1. Ask what basis the policy is rated on and what period is being audited, if it is not stated.
2. Pull the numbers from the books rather than the bank. Gross receipts is not deposits — refunds, transfers, loan proceeds and financing deposits are not revenue, and letting deposits stand in for revenue overstates your exposure and your premium.
3. Assemble the certificates before you send anything, and identify the gaps yourself. A sub you know is missing cover is a problem you can price; one the auditor finds first is a bill.
4. Reconcile your sub payment total to your 1099s. If those two disagree, expect to be asked why.
5. Read the findings when they arrive. If exposure was reclassified, understand the reason, because it will happen again next year unless the underlying records change.

The habit that fixes both audits and the 1099s

One rule, applied without exception:

Before a subcontractor is paid the first dollar, you hold their W-9, their general liability certificate and their workers comp certificate — and the expiry dates go somewhere a human checks monthly.

Everything else follows from that. Payments tracked by payee through the year turn all three annual obligations into reports you run rather than projects you survive, and it removes the largest single source of audit findings in the trades.

Related

• Surviving your workers comp audit
• The 1099 deadline is close and you are missing W-9s
• 1099 or W-2? Classifying the people who work for you

This is general information about how premium audits commonly work. Rating bases, certificate requirements and what may be excluded from gross receipts vary by carrier, policy form and state — confirm the specifics with your agent.