Latest / Franchise Conversations with Fexingo: Buying, Running, and Scaling Franchise Businesses / How Franchisees Win with Insurance Audits
Transcript
- Lucas: Luna, I was talking to a franchisee last week who runs a dozen sandwich shops, and he mentioned he just got a check back from his insurance carrier for over twelve thousand dollars. I asked him how, and he said it was an insurance audit. Luna: An insurance audit? That sounds like something that would cost you money, not make you money. Lucas: Most people think of it as a bill, right? The carrier sends someone to verify your payroll and sales, and if you underpaid, you owe more. But it works the other way too, and most franchisees never ask for one. Luna: So you're saying you can actually initiate an audit yourself and get money back? Lucas: Exactly. And this guy's case is a perfect example. His workers' comp premium was based on a payroll classification that assumed his managers were doing a lot of kitchen prep. But in reality, they were mostly behind the counter, which is a lower rate class. That misclassification had been going on for three years. Luna: Three years of overpaying. That's not chump change. Lucas: No, and it's more common than you'd think. The thing is, insurance companies don't have a strong incentive to fix your classification. They're not going to volunteer to lower your premium. You have to ask for the audit, and you have to know what to look for. Luna: Before we dive deeper, I want to pause here. You know, we do this show without ads, and that's only possible because a small group of listeners throws in a few bucks each month on buy me a coffee dot com slash fexingo. If this conversation has ever saved you money or made you think differently about your business, consider joining them. It's a tiny gesture that keeps these episodes coming. Lucas: Yeah, and we genuinely appreciate that. It keeps the whole thing independent and ad-free. But let's get back to audits, because there's a real play here. Luna: So walk me through this. How does a franchisee know if their premium is too high? Lucas: The first thing to understand is the experience modification factor, or mod. It's a multiplier that compares your claims history to what's average for your industry. A mod of one point zero is average. If you're below that, you get a discount. Above, you pay a penalty. Luna: And I'm guessing most franchisees have no idea what their mod is. Lucas: Right. And it's not just the mod. It's also the payroll classification. Those two things together determine your premium. If either one is off, you're overpaying. The mod is usually set by the state, but the classification is something you can challenge. Luna: So how do you challenge it? Do you just call your carrier and say, 'Hey, I think I'm in the wrong class?' Lucas: That's a start, but the smart move is to do your own audit first. Pull your payroll records and compare them to the job descriptions in your policy. You might find that a position like 'shift supervisor' is being coded as a cook when they're mostly handling cash. That's a classic mistake. Luna: And that's exactly what happened with the sandwich shop guy. His managers were coded as food prep, which is a higher risk category, and that alone was costing him about four grand a year. Luna: Four grand a year times three years is twelve thousand. That math works. But doesn't the carrier do an audit at the end of the policy year? Why didn't they catch it? Lucas: They do a payroll audit, but they usually just look at total payroll, not the breakdown by job function. They see a number, they apply the classification that's already on file. They don't dig into whether that classification is accurate unless you ask. Luna: So it's kind of on you to be the squeaky wheel. Lucas: Exactly. And there's another angle: the mod itself. If you've had claims that were minor or even not your fault, they can still drag your mod up. You can request a mod review with the rating bureau, and sometimes they'll adjust it retroactively. It's a formal process, but it's not impossible. Luna: Have you seen anyone actually win a mod hearing? Lucas: I have. A franchise owner with a few quick-service restaurants had a couple of slip and falls that pushed his mod to one point two. That meant he was paying twenty percent more on a forty-thousand-dollar premium. Eight thousand dollars a year. He challenged it, and the bureau agreed one of the claims was exaggerated. He got it down to zero point nine, and the refund was substantial. Luna: So a one-point swing on the mod can mean five figures. That's huge. Lucas: It is. And the best part is, you don't need a lawyer. You can hire an independent insurance broker who specializes in franchise operations. They know the classifications, they know how to talk to carriers, and they often work on contingency, taking a cut of what they save you. Luna: That's interesting, because most franchisees just go with whatever the franchisor recommends. Lucas: Right, and some franchisors have programs where they get a cut of the premium. That's not necessarily bad, but it means no one is pushing to lower your cost. An independent broker has a different incentive. Luna: So what's the first step for a franchisee who wants to do this? Do they just look at their policy and try to understand what they're paying for? Lucas: Yes, but before renewal, not after. You want to give yourself a few months to do the audit, gather payroll data, and get a broker on board if you need one. Rushing it at the last minute gives you no leverage. Luna: And if you find misclassifications? What do you do with that? Lucas: You submit a formal reclassification request to the carrier, with documentation. They have to respond in writing. If they push back, you can go to the state insurance department. That's a powerful card, because carriers don't want to get on the regulators' radar. Luna: That sounds like a lot of work, but the payoff seems worth it. I mean, twelve grand for a few hours of research. Lucas: And it's not just workers' comp. General liability is another place where audits can reveal overpayments. If your policy is based on gross sales, and you have a lot of catering that's lower risk than dine-in, you might be paying too much. Luna: So the same principle applies across different types of coverage. Lucas: Exactly. And let's be clear, this isn't about defrauding anyone. It's about making sure you're paying the right amount for the right risk. The system is designed to be accurate, but it only works if you participate. Luna: I love that framing. It's not gaming the system, it's correcting the system. Lucas: Right. And the franchisee I talked to, he's now planning to make this a yearly ritual. He's going to review his classifications, check his mod, and get quotes from a couple of independent brokers every time his policy comes up for renewal. Luna: That's a smart habit. It's the kind of thing that can easily add five figures to your bottom line without selling one more sandwich. Lucas: That's the beauty of it. It's pure profit. And it's a competitive advantage, because most of your competitors are probably not doing this. Luna: So as we wrap up, what's the one takeaway you want listeners to remember? Lucas: Before your next insurance renewal, do an internal audit. Look at your payroll classifications, understand your mod, and get an independent second opinion. It could be the easiest money you ever make. Luna: And maybe the most overlooked. Thanks for listening, everyone. We'll have another conversation for you tomorrow. Lucas: See you then.