General liability insurance is a critical aspect of risk management for homebuilders. It protects businesses from financial loss due to accidents, injuries, and property damage that might occur on or off the job site. However, many homebuilders face challenges in understanding how premiums are calculated, why audits are conducted, and how employee compensation can influence the outcome of these audits. This white paper explores these key elements and provides insights to help homebuilders manage their general liability audits effectively.

Premium Calculation for Homebuilders

General liability premiums for homebuilders are determined based on several factors. Each carrier will differ on how they handle there audits so it is important to know how your general liability carrier manages their audits, so you can be prepared. These factors include:

• Estimated Annual Revenue or Payroll:

  • At the inception of the policy, carriers calculate premiums based on an estimate of the business's annual gross revenue or payroll. These estimates serve as a baseline or deposit for the policy period.

• Type of Work Performed:

  • Homebuilders are categorized based on the nature of their work, such as residential, commercial, or remodeling projects. Each category carries a different risk profile and corresponding rate.

• Subcontractor Management:

  • Premiums may also depend on whether subcontractors are utilized and whether they carry their own insurance. Uninsured subcontractors often increase the premium.

• Employee Classifications:

  • The classification of employees—such as laborers, project managers or owners—impacts the premium. Labor-intensive roles typically carry higher risk and, therefore, higher rates.

Year-End Audits and Owed Premium Adjustments

The Audit Process

At the end of the policy period, insurance carriers conduct an audit to reconcile estimated figures with actual business operations. This involves reviewing:

• Actual payroll records & Check registers

• Revenue reports.

• Subcontractor agreements and certificates of insurance.

• IRS 941 Forms

Why You May Owe Money

• Underestimated Payroll or Revenue

  • If your actual payroll or revenue exceeds the initial estimates, you will likely owe additional premiums. It is also important to update your agent if you exceed your estimates, so they can help you prepare for your upcoming audit.

• Employee Classification Discrepancies:

  • Misclassified employees or unreported roles can lead to adjustments, often resulting in higher premiums.

• Uninsured Subcontractors:

  • If you hired subcontractors without valid certificates of insurance, you could be charged for their liability risk, increasing your premium.

4. Mitigating End-of-Year Costs

• Provide Accurate Estimates: Begin the policy period with realistic revenue and payroll projections to minimize discrepancies.

  1. Track Subcontractor Insurance: Ensure all subcontractors provide up-to-date proof of insurance.

  2. Organize Records: Maintain clear and detailed payroll and revenue documentation to streamline the audit process.

Highly Compensated Employees and Flat Fees

Impact of Highly Compensated Employees

Homebuilders often employ highly compensated individuals, such as owners, executives, and project managers. These roles can significantly affect general liability audits for the following reasons:

• Higher Payroll Contribution: Since premiums are often payroll-based, higher salaries inflate the payroll total, leading to increased premiums.

• Exempt Payroll Caps: Some Carriers cap the amount of payroll that is subject to premium calculations for owners or highly compensated employees, providing cost predictability.

• Classification Variations: Certain carriers categorize owners and project managers as lower-risk compared to laborers, which can reduce their impact on premiums. However, misclassification of these roles during audits can lead to premium surcharges.

Flat Fees for Owners and Project Managers

Certain carriers adopt flat-fee structures for owners and project managers instead of basing premiums on their payroll. Benefits of this approach include:

• Cost Certainty:

  • A flat fee avoids the variability associated with fluctuating payroll.

• Simplified Audits:

  • Reduces the administrative burden during audits, as these roles are not included in payroll-based calculations

Carriers that offer flat fees typically determine the rate based on industry standards and the overall risk associated with homebuilding operations. Homebuilders should discuss these options with their insurance brokers to assess whether flat fees align with their operational and financial goals.

Conclusion

General liability audits are an integral part of managing insurance for homebuilders, ensuring that premiums accurately reflect the business's actual operations. To avoid unexpected costs, homebuilders should prioritize accurate payroll and revenue estimates, maintain organized records, and evaluate the implications of highly compensated employees on their policies. Additionally, exploring carriers that offer flat fees for owners and project managers can provide financial stability and administrative efficiency.

At the end of the day, no one likes going through an audit. Especially when you are hit with an unexpected credit. That is why it is so important to work with an agent who can help you understand the audit process for your specific carrier. By doing this, you can help mitigate unexpected surprises and get back to what you do best, homebuilding.