Accurately Project Payroll and Sub Costs

To do otherwise is asking for trouble

I was talking to a new business prospect the other day while gathering information to quote the insurance for his residential construction business.  When I asked him about his employee payroll and any amounts paid to uninsured subcontractors, he stated that he wanted to underestimate them so he wouldn’t have to pay so much money upfront.  After all, the economy is rough and he thought he might be better equipped financially to pay the additional premiums after the audits had been completed.

This thought process is more common than you might think, and it is extremely dangerous.  During my years in the insurance industry I’ve seen way too many businesses go bankrupt because of underestimating their payrolls and gross sales.

The reality is that additional premiums resulting from an audit are due within 30 days and cannot be financed.  If you can’t pay the audit additional premiums when due, the insurance company will cancel your current policies.  Once your policies are canceled, along with any certificates of insurance that may have been issued, your business comes to a halt.  No insurance = no certificates, and no certificates = no jobs.  In addition, the insurance company will turn the unpaid debt over to a collection agency, which will impact your credit score.

The next thing I usually hear when I explain this is, “Well, I’ll just get insurance with another insurance company.”

Unfortunately, unpaid audit premiums must be disclosed on the insurance applications, as well as the reason for your prior insurance policies being canceled.  Believe me when I tell you that no insurance company is going to write a policy for you if you owe another insurance company money.  If you don’t disclose the information on the application then you have committed fraud, which is a topic for a whole different blog post.

In conclusion, the best course of action is to be as accurate as possible when estimating employee payrolls and subcontractor costs to minimize large audit additional premiums. It’s much easier to spread the premiums out over months than to try and come up with the money in 30 days.