Tax Returns for Renewal of Liability Insurance

[Otis P. Driftwood]

A relative who is in the contracting field called me last night and said his liability insurance is coming up for renewal the 1st of the year. Weird thing, is this time,
along with the "1000 questions" form, the insurance company wants tax returns for the past 4 years showing income. He asked the insurance company why and got "We are making sure that contractors are legal and are not hiding any income or expenses, as the illegal contractor problem has caused major insurance problems".

Sounds real nice of them, I can see a DNA test coming on the horizon, or a personality test of some form. Any way an insurance company can drop somebody, they'll find a way IMHO.

[George Roberts]

Insurance premiums are based on how much work you do. The more $$$ of work you do the more $$$ of liability your insurer has.

It is a common practice for a builder to hide his income from the insurer to reduce his premiums.

[Otis P. Driftwood]

Makes sense. He has had the same insurance company for 7 years now, and it's part of their new policy. FWIW, they also asked for a detailed list of clients, as well as did a credit check with the 3 major credit agencies. When my commercial insurance for my '88 Van came up, I was asked if I "used a plow", as some insurance companies will not allow snow plows w/out major increases in insurance. As if a '88 cube van could plow snow....

Whatever...

[David Meiland]

I'd give them whatever they want. It's business, they're not prying into your personal life. If you have an audit or a claim they'll be asking for all that and more. He or she with the best written documentation stands the best chance. I hope that most or all of you guys could produce a written contract for any job you might ever have a claim on, along with invoices and photocopies of checks from your clients to match. Why give them reason to doubt or deny a claim if you have one?

[Dancing Dan]

I also know most companies have one rate for "artisans" (i.e. - contractors who generate all or most of their income through their own or their employees' labor) and a different one for GC's who generate income through subcontractors. My company hasn't asked for tax returns (yet) but do include a breakdown of subcontractor income and expense as part of their annual audit.

[A.P.G.C.]

My favorite day of the year is Worker's Comp payment day. And since it's under $5k they want it all at once... at the end of December... not exactly the month when the account is at its fullest.

[Stacey]

I have always had to supply 1099's and 941's every year to my insurance company during the audit. They send me a list to have ready before they come by. They only verify figures and they don't copy the information before they leave my office.

[Dick Seibert]

Originally Posted by Otis

"We are making sure that contractors are legal and are not hiding any income or expenses, as the illegal contractor problem has caused major insurance problems".

This says it all, they need to be sure:

1) You are not hiding income so they collect the full premium due, since insurance is pooled risk it's not fair to the honorable contractors to have to pay more because others pay less by hiding income.

2) You are not hiding where your expenses are going, they need to be sure you are not subcontracting more than your alloted percentage amount, and the money you are paying to subcontractors is going to legitimate contractors who are paying for liability insurance and Workers' Comp on their employees, so the claims against those subcontractors can't come back on you where they could be liable.

They are doing all of us a favor by doing this, they should be auditing all of our subcontractors to be sure they are legal and acting legally in every respect.

[Otis P. Driftwood]

Agreed, give them all the information they want...

[Bob the QB BeanCounter]

At audit time, our liability insurance company requested similar info.
btw - our premiums are based on sales and subcontract cost.
So we gave them only those 2 items.

We felt every page of our tax return was none of their business. What they did receive, via our CPA, was the page of the return showing the sales and subcontractor costs, and the page with our signature/date. All other dollar amounts were blacked out.

They accepted it.

Other info they requested and we graciously complied:
They requested a printout of our subcontractor account, showing the total matched what was on the tax return. And showing the details of which subs we paid. No problem.

They then asked for copies of the 1099s and certificates of insurance from our subcontractors. We complied, since our premiums we partially based on subcontractor costs.

and everyone was happy. We simply gave them info that coresponded to our premium calculation (ie sales and subcontractor expenses). Nothing more, nothing less.

[Otis P. Driftwood]

Originally Posted by Otis P. Driftwood

A relative who is in the contracting field called me last night and said his liability insurance is coming up for renewal the 1st of the year. Weird thing, is this time,
along with the "1000 questions" form, the insurance company wants tax returns for the past 4 years showing income. He asked the insurance company why and got "We are making sure that contractors are legal and are not hiding any income or expenses, as the illegal contractor problem has caused major insurance problems".

Sounds real nice of them, I can see a DNA test coming on the horizon, or a personality test of some form. Any way an insurance company can drop somebody, they'll find a way IMHO.

As a follow up, the relative's liability insurance was cancelled, as "we do not insure 1 man operations anymore" response was given by the insurance company. I'm hearing a lot of this as insurance companies don't want to waste their time on small-time-operations. IMHO, the economy is more likely the real reason...