As a business owner, you are constantly juggling a dozen different things. The last thing you want to deal with is a surprise bill from your insurance company. However, for many businesses, this is a very real possibility if you do not complete your annual Commercial General Liability audit. 
What is Commercial General Liability Insurance?
First, let us quickly break down what a Commercial General Liability policy is. It is a fundamental type of business insurance that protects you from financial loss due to a variety of claims, including:
- Bodily Injury: If a customer ingests one of your products and it makes them sick, your Commercial General Liability policy can cover their medical expenses and your legal defense costs.
- Property Damage: If a product you sold causes a fire at someone’s home or business, your Commercial General Liability policy can help pay for the repair or replacement.
- Personal and Advertising Injury: This covers claims like libel, slander, or copyright infringement.
Essentially, Commercial General Liability is the safety net for the everyday risks that come with running a business.
The Role of the Annual Gross Sales Audit
When you first purchase your Commercial General Liability policy, your premium is calculated based on an estimate of your business's risk factors. For many businesses, especially those in retail, manufacturing, or service industries, a key factor in this calculation is your annual gross sales. The logic is simple: the more sales you have, the more exposure your business has to potential claims.
The annual audit is the insurance company's way of reconciling the estimated sales you provided at the beginning of the policy period with your actual gross sales for the year. This is a contractual obligation you agree to when you sign your policy.
The Dangers of Ignoring the Audit
It is tempting to put off an audit, but doing so can have serious financial consequences. If you fail to complete the audit, the insurance company will take matters into its own hands. This often results in a "non-compliance" audit, where they:
- Assume the worst: The insurer will estimate your sales at the highest possible rate, assuming your business grew exponentially.
- Apply significant penalties: Many policies have clauses that allow the insurer to apply a hefty surcharge, sometimes as much as 20% to 50%, for non-compliance.
- Potentially cancel your policy: Continued failure to comply is a breach of your contract, and the insurer can choose to cancel your coverage, leaving your business exposed.
- Damage your business credit: If you receive a large bill from a non-compliance audit and do not pay it, the debt could be sent to a collection agency, harming your business's credit rating.
The Upside of Completing Your Audit
An audit is not just about avoiding penalties; it can actually work in your favor.
- You could get a refund: If your actual gross sales were lower than your initial estimate, you may be eligible for a credit or a refund.
- You ensure accurate coverage: The audit ensures you are paying for the right amount of coverage. If you underreported your sales and a large claim occurs, you could find your coverage is insufficient. By providing accurate information, you can be confident that your policy is properly aligned with your business's true risk.
- It keeps your rates fair: By providing accurate information, you help the insurance company give you a fair premium that reflects your business's actual risk profile.
How to Prepare for Your Audit
The best way to handle an audit is to be prepared.
- Keep meticulous records: Maintain organized and accurate financial records throughout the year, including your general ledger, profit and loss statements, and tax returns.
- Understand your policy: Work with your insurance agent to understand what information your specific policy requires for the audit.
- Appoint a point person: Designate a specific employee to be the main contact for the audit process, ensuring all communications are handled promptly.
- Respond promptly: When you receive a request for an audit, complete it as soon as possible. The sooner you provide the necessary information, the sooner you will know your final premium.
The annual Commercial General Liability audit is a routine part of doing business. By treating it as a standard business task rather than a nuisance, you can avoid costly surprises and ensure your business has the proper coverage it needs to thrive.