Navigating Insurance Audits: An Overview of the Rikor Franchisee Preparation Guide

Insurance premium audits are a standard process for businesses, including franchisees, particularly for policies like General Liability and Workers' Compensation. To help franchisees navigate this often complex requirement, the Rikor Franchisee Audit Preparation Guide provides a comprehensive checklist and answers common questions. Understanding this process is crucial for both franchisees and franchisors to ensure financial accuracy and compliance.

Why Audits are Necessary:

Insurance premiums for policies like Workers' Compensation and General Liability are often initially based on estimated figures (like projected payroll, revenue, or subcontractor costs). An end-of-term audit verifies the actual figures. This process ensures:

• Accurate Premiums: The final premium reflects the actual exposure during the policy period, leading to adjustments (either additional premium due or a credit).
• Correct Classifications: Audits confirm employees and operations are classified correctly, which is vital for proper rating and coverage.
• Compliance: Audits, especially for Workers' Compensation, are often required by state law.

Key Aspects Covered in the Guide:

The Rikor guide addresses critical areas to help franchisees prepare effectively:

• Common Questions: It clarifies why audits are needed, the consequences of non-compliance (potential penalties, inaccurate premiums), options for audit completion (online vs. physical), how to dispute results (within 15 days with documentation), why separate audits might occur for different policies, and the obligation to complete audits even for canceled policies.
• Audit Preparation Checklist: This is the core of the guide, outlining essential steps:
• Personnel: Ensuring a knowledgeable person (owner, officer) is available.
• Record Gathering: Compiling necessary documents like payroll records (gross pay, overtime), quarterly reports (941s, state unemployment), subcontractor payment details, original invoices (especially for uninsured subs, separating labor/materials), Certificates of Insurance (COIs) from subcontractors, check registers, tax returns, and potentially project-specific details (OCIP/CCIP).
• Subcontractor Verification: Emphasizing the critical need to obtain, verify, and maintain current COIs from all subcontractors before they start work, listing the franchisee as a certificate holder. Failing to do so can result in the franchisee being charged premium for the subcontractor's exposure.
• Cost Separation: Differentiating between labor and material costs for subcontractors, as insurers may assume higher labor exposure if not clearly broken down.
• Accurate Classification: Keeping records classified by job site and ensuring employees are assigned correct class codes based on duties, not just job titles. Incorrect classification can lead to significantly higher premiums.
• Remuneration Details: Accurately documenting all components of payroll (gross pay, bonuses, vacation) and properly separating excludable overtime pay.
• Officer/Owner Status: Correctly identifying owners/officers and their inclusion/exclusion status according to state rules and policy terms.
• Organization: Recommending tools and practices (like QuickBooks reports, shared digital folders) for maintaining organized records throughout the year.
• Final Review: Stressing the importance of carefully reviewing the final audit statement and disputing any discrepancies promptly with supporting documentation.

Why This Matters for Franchisors:

Encouraging franchisees to utilize this preparation guide helps ensure they:

• Maintain accurate financial records related to insurance exposures.
• Avoid unexpected large audit bills or penalties due to poor record-keeping or non-compliance.
• Manage subcontractor relationships responsibly regarding insurance verification.
• Pay the correct premium for their actual risk, contributing to their financial stability.

Proper audit preparation protects the franchisee from financial strain and compliance issues, ultimately benefiting the health and reputation of the entire franchise system. This guide from Rikor Insurance Consulting is a practical tool to achieve that preparedness.