Accurate records can make the process much easier
Unlike coverage for your equipment or buildings, liability and workers’ compensation premiums are based upon what you estimate your revenues will be for the upcoming policy year. If the number you provide on your insurance application for your estimated sales is low, you will owe your insurance company additional premium. If your estimate was high, your insurance company will return premium to you.
How is your general liability premium determined? There are very specific rules that insurance companies must abide by or they will get fined by the state. The rating basis for determining the premium charge for the primary rental store classifications is gross sales. It gets very technical. “Gross sales” is defined as the gross amount charged by the named insured, concessionaires of the named insured or by others trading under the insured’s name, for:
- All goods or products sold or distributed.
- Operations performed during the policy period.
- Rentals (equipment rentals, not real property).
- Dues or fees.
The following items shall be deducted from gross sales:
- Sales or excise taxes, which are collected and submitted to a government division.
- Credits for repossessed merchandise and products returned.
- Allowances for damaged and spoiled goods.
- Finance charges for items sold on installments.
- Freight charges on sales if freight is charged as a separate item on the customers invoice.
- Damage waivers.
The following items are considered to be part of gross sales and shall not be deducted:
- Re-rent revenues and revenues that flow through your business to another rental entity (i.e. when a renter pays you to secure rental inventory from other rental stores).
- Labor charges for setting up or taking down inventory for a special event, including such items as tents and inflatables.
As you know, your revenue can fluctuate based upon many factors, just a few of which are the weather, the economy and operating expenses. Correctly estimating your revenue will lessen any amount due as a result of a premium audit of your insurance policy. It also will decrease the chance of overestimates. It is better to have the money in your pocket.
Remember, an insurance premium audit is a provision of your policy contract. It is generally performed shortly after policy expiration. A premium audit also is performed after policy cancellation to determine your final earned premium for the shortened policy period. Audits typically will occur on an annual basis. Accurate records that are complete and well organized make the audit process much easier and also can save you money. Less complex policies may only require you to send the necessary information to the insurance company or have the information available when the telephone auditor calls. Larger and more complicated policies are generally performed at your place of business by a field auditor.
Don’t hesitate to talk to your insurance company or your agent to make sure that you fully understand the process and the information you need to report.
Phil Kelling is president and CEO, ARA Insurance, Kansas City, Mo. For more information, call 800-821-6580 or visit ARAinsure.com.