Jim was a small contractor needing a small workers compensation policy. Jim's insurance agent, Christopher, provided exactly what he needed. The estimated policy premium was $850. The policy was issued, Jim paid the premium and the matter was resolved. The agent-client relationship continued without any apparent concern when the policy renewed for the same premium as the first year. Jim then received the first of two shocks. Cincinnati Insurance Company billed him for $12,503 in additional premium as a result of the premium audit it performed on his business. After the second policy term, Cincinnati's premium audit resulted in an additional premium charge of $10,747. Cincinnati Insurance and Jim failed to reach an agreement, Jim refused to pay and Cincinnati sued to collect the $23,250 total premium due. Jim turned around and sued Christopher, requesting he pay $22,500 because he neglected to properly explain the potential increase in premium.

Christopher argued that he had performed his job faithfully by obtaining the policy as requested and that Jim simply neglected to read it. He stated that he informed Jim that there would be a premium audit but admitted that he did not mention the possibility of an additional premium as a result of it.

The trial court ruled in Christopher’s favor but the appellate court overturned that decision in favor of Jim. Its opinion was that, even if Jim had read the policy, he would not have expected an additional premium equal to nearly 15 times the original charge.

Do your customers understand the difference between an estimated annual premium and an annual premium? Many policies are subject to audit. When the premium indicated on the declarations is estimated, the named insured should be informed and prepared for a premium audit that might result in an additional premium. Part Five of the National Council on Compensation Insurance (NCCI) Workers Compensation and Employers Liability policy thoroughly explains how the premium is calculated as well as how the audit procedure works.

How do you notify clients of additional premiums due? Some customers receive their bills directly from the insurance company and these additional premiums are also billed directly. On the other hand, if your agency mails audit bills to your clients, a note explaining the reasons for the additional premium is helpful.

A premium audit is more than simply finalizing the expired policy's premium; it is a snapshot of your client’s operation. Premium audits reveal any new classifications required, along with increases or decreases in payrolls and receipts. They can also uncover changes in addresses and insureds. Reviewing the premium audit with your client is an excellent way to review changes that could require adjustments in its insurance program.

The Commercial Lines Risk Evaluation System narratives for service risks have been updated. Some NAICS and GL Class Codes have been revised and all exposure discussions broadened and enhanced.

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