Snow, Ice, and Slip-and-Fall Claims: 7 Things Business Owners Should Have in Place Before the First Storm

Many business owners get an unpleasant letter a few months after their workers’ compensation or general liability policy renews: an additional premium bill. The cause is the premium audit, the insurer’s review of your actual payroll, sales, or subcontractor costs after the policy period ends. A good year of growth often shows up here first. Here are the questions owners ask most, with plain answers.

What is a premium audit, and why does it happen?

Workers’ comp and many general liability policies are priced on estimates made at the start of the policy, usually payroll for comp and payroll or sales for liability. Once the policy ends, the insurer compares those estimates to your actual figures and adjusts the premium. If payroll grew 20% because you hired or gave raises, the premium generally grows with it. If business shrank, you may receive a refund. Audits may be done by mail, by phone, or in person, depending on the size of the policy.

What counts as payroll in a premium audit?

More than many owners expect. Under the payroll rules in the NCCI Basic Manual, used in many states, payroll includes wages and salaries, bonuses, commissions, holiday and vacation pay, and employee salary reductions for retirement or cafeteria plans. Excluded items include tips, severance pay, employer contributions to retirement or cafeteria plans, and expense reimbursements your records verify as valid business expenses.

Can overtime be excluded?

Often the extra portion can, if your records support it. Under the NCCI rules, only the amount above straight-time pay is excluded, and only when your records show overtime separately by employee and in summary by classification. If you record time-and-a-half as one combined figure, one-third of that total is excluded. Ask your payroll provider to break out the overtime premium now so it is ready at audit time. Some states use their own rating bureaus, so confirm the rules that apply to you.

Why do class codes matter so much?

NCCI, the rating organization used for workers’ comp in many states, maintains the classification system. Each employee’s payroll is assigned to a class code with its own rate, and clerical rates are far lower than field or warehouse rates. If records do not clearly separate an employee’s office work from higher-risk work, the auditor may assign all of it to the higher rate. Keep job descriptions current and track divided duties where the rules allow it.

Do owner and executive officer wages count?

Usually, within limits. Many states set minimum and maximum payroll amounts for executive officers, and some allow certain owners to exclude themselves from coverage. The rules vary by state and entity type, so confirm how your owners are treated before the auditor arrives.

What about subcontractors?

This is the most common source of surprise bills. If a subcontractor cannot show a valid certificate of insurance for the period they worked for you, the insurer may add what you paid them to your own payroll. Collect certificates before work begins, track expiration dates, and keep copies with your payment records.

How should we prepare for the auditor?

• Gather payroll reports, quarterly tax filings, and a general ledger for the full policy period.
• Separate overtime premium pay and verified expense reimbursements.
• Organize subcontractor payments with matching certificates of insurance.
• Prepare job descriptions for employees whose duties span classifications.
• Ask for the audit worksheet afterward and dispute errors in writing. Our commercial insurance team can review a worksheet with you.

What if our estimates are already out of date?

Call your broker mid-term. Many insurers will adjust the estimated exposure on the policy, which spreads the difference across remaining installments in place of one large bill later. Owners who grew quickly this year should make that call before year-end. Clear payroll categories also make related compliance work easier, which our HR compliance and legal team can support.

Looking Ahead to 2027

Set up next year’s records with the audit in mind from the first payroll in January: separate overtime premium pay, code divided duties, and track subcontractor certificates as you go. Revisit your estimates at midyear, especially if hiring or revenue plans change. Tooher-Ferraris will help you build a premium audit routine so your 2027 audit holds no surprises.

Picture a Tuesday in January. The founder of a 40-person engineering firm, the person who holds the biggest client relationships and personally guarantees the bank line, dies suddenly at 56. By Friday, two major clients are asking who will run their projects. By the end of the month, the bank wants to discuss the loan covenants. The firm is still profitable on paper, and it is already running short of cash and credibility.

Key person life insurance is a policy a business buys on the life of an owner or employee whose loss would damage revenue, credit, or operations. The business owns the policy, pays the premium, and receives the benefit. Few owners have planned for that moment. In a Chase for Business survey of about 1,000 owners this spring, 70% said they are in early-stage succession planning or have no formal plan, and only 8% said they are fully prepared to transition ownership.

What Key Person Life Insurance Pays For

The death benefit arrives as unrestricted cash, which is exactly what a business needs in the months after a loss. Owners typically use it for four jobs: replacing revenue while clients are reassured or reassigned, recruiting and training a successor, keeping lenders comfortable or paying down debt the deceased guaranteed, and covering payroll so remaining employees stay put. In the engineering firm’s case, a properly sized policy would buy a year or more to stabilize.

How to Size the Policy

Insurers want a financial reason for the amount you request, so start with the numbers. Common approaches include a multiple of the person’s total compensation, the share of profit the person generates, the full cost of replacing them (search fees, training time, and contracts likely to walk), and any business debt the person has personally guaranteed. Calculate each, then choose the figure you can document. Revisit it whenever revenue, debt, or the person’s role changes.

The Tax Rules That Trip Up Owners

Premiums are generally not deductible when the business is the beneficiary. The death benefit is generally received income tax free, but only if the business follows the notice and consent rules for employer-owned life insurance under Internal Revenue Code Section 101(j). Before the policy is issued, the employee must receive written notice that the business intends to insure their life and the maximum face amount, must be told the business will be the beneficiary, and must consent in writing, including to coverage that may continue after employment ends.

The insured also generally needs to fit an exception, such as being an employee within the 12 months before death or a director or highly compensated employee when the policy was issued. The business then files IRS Form 8925 each year it owns the policy. Missing paperwork can make the proceeds above premiums paid taxable, a costly mistake at the worst possible time. Confirm the details with your tax advisor.

Keep Key Person Coverage Separate From Buy-Sell Funding

Key person coverage keeps the business running. A buy-sell agreement decides who buys a deceased owner’s shares and at what price. They solve different problems, and the 2024 Supreme Court decision in Connelly v. United States made the distinction more important. The Court held that company-owned life insurance used to redeem a deceased owner’s shares adds to the company’s value for estate tax purposes. In that case, the IRS counted $3.5 million of policy proceeds and assessed roughly $890,000 in additional estate tax.

Owners with redemption agreements funded by company-owned policies should review the structure with their attorney. Alternatives such as a cross-purchase arrangement or a separate entity that holds the policies may fit better. The American Bar Association’s summary outlines the planning steps estate attorneys are considering.

Term or Permanent?

Term coverage fits a defined window, such as the life of a loan or a planned five-year transition. Permanent coverage can suit long-term owners or arrangements expected to last decades. Many businesses also pair life coverage with key person disability insurance, since a long illness can disrupt a business as severely as a death. Our life insurance team can compare both approaches.

Back to January

With a policy in place, the engineering firm’s first call after the funeral goes to its insurer. The claim pays within weeks, the bank sees cash on the balance sheet, and the leadership team has the time to promote and hire without losing the clients the founder spent years winning.

What to Ask Your Broker

• Who in our business would cause the biggest financial gap if we lost them tomorrow?
• How much coverage can we justify to an underwriter, and on what basis?
• Have we completed and kept the Section 101(j) notice and consent forms for every insured employee?
• Is our buy-sell agreement funded in a way that holds up after the Connelly decision?
• Should we add key person disability coverage alongside the life policy?

Tooher-Ferraris can review your key person and buy-sell coverage alongside the rest of your business insurance program.