We Answer Your Questions About Insurance Audits

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A business owner is often terrified when they’re notified they’re being audited. Not necessarily because you did anything wrong, but because you don’t always know if you did everything right. Not only that, but most people think of an IRS audit and the negative connotations that come with it. But what is a commercial insurance audit? What does it look like for a small business? what are some tips to help you through the process? Read on to learn more.

What is an insurance audit?

An insurance audit is how an insurance company determines whether or not your business is insured for the correct amount of risk and if your business is classified correctly. For example, an insurance company can audit you to determine you’re paying for the correct premium for your General Liability Insurance or Workers’ Compensation. After an audit, your final premium will likely be different than what you originally paid.

What is a Premium Audit?

Your premium is calculated based on estimates of your business’s exposure. Occasionally, an insurance company will conduct a premium audit to make sure the insurance premium you're paying is accurate. It could mean a future bump in your premium. But in some cases, the audit process shows that you're due a refund of some of your premium.

What the Audit Process Looks Like

So what does the insurance auditing process tend to look like for a business? What do you need to have available for a premium audit?

  1. As stated earlier, your initial report to insurance companies is how your deposit premium is originally quoted. An insurance company will often conduct a preliminary review and approve your initial premium on estimated versus actual costs.
  2. The insurance agent/broker shares what you report on your application to various carriers, and the best insurance premium options are presented to you.
  3. You choose a carrier and your premium is typically locked in for a 12 month policy period.
  4. 30–90 days after your policy period ends, you’ll be sent a “worksheet” where you complete information about the previous year’s revenue and gross sales.
  5. If during the audit process it's found that your revenue was higher than projected, your premium for the previous year will be adjusted up (or lowered if your projections were higher) and the policy is amended. 
  6. You must pay the difference from the original premium to the amended final premium—or fight the results if you disagree with it.

Premium audits are commonly conducted remotely based on the numbers you provide. You'll be asked to provide supporting documentation such as records and tax documents by mail. Occasionally, an auditor will request to make an appointment to come to your place of business or accountant's office to go over payroll, revenue, etc. in person.

Types of Common Insurance Company Audits

An auditor comes in to verify two primary things: sales and payroll. Both are things that you self-report when you initially obtain insurance. An auditor may also verify job descriptions and the number of employees. These things are scrutinized during the policy year. To ascertain what a business’s premiums are, an accurate overview of the exposure is necessary.

So what type of audit could you face? Here are two of the common audits.

General Liability Insurance Audit

General liability policies are rated using certain factors, one of which is your annual gross sales. During the application process, you’re usually asked what your projective revenue could be for the next 12 months. Auditors verify that your revenue truly is what you reported it to be. If the sales numbers are higher or lower, your final general liability premium will be adjusted accordingly.

Workers' Compensation Insurance Premium Audit

Because workers' compensation premiums are based on how many employees you have, how they're classified, and what your payroll is, your insurance company will want to make sure that the data you're reporting is accurate. An insurance agent might audit your records as often as every quarter and sometimes monthly.

Worker's compensation is priced based on your employee payroll numbers. A risk modifier is multiplied by payroll/number of employees to calculate your premium. This typically applies to employees and subcontractors.

Exactly what type of records does an auditor look at when conducting a premium audit?

  • Tax documents such as W-2’s, 941s, and 1099s
  • Ledgers
  • COIs
  • Job duties
  • Sales tax reports
  • Cash Summaries
  • Unemployment reports

An auditor may need more related data to determine what you'll pay for commercial insurance, this is just a starting place to help prepare you.

"Pay-As-You-Go" Workers' Compensation Policies

Some insurance companies offer pay-as-you-go workers' comp policies. Every payroll period, you report your payroll directly to the insurance company—and pay exactly what you owe each month based on your reported payroll. This eliminates the need for a premium audit and you know you’re not overpaying. 

Other Things to Be Aware of in an Audit

If your sales increase exponentially or your workforce increases or decreases by a significant amount during the middle of your policy term, consider contacting your broker to adjust what you pay for your coverage. Your policy may be able to be renegotiated during the middle of the year so you aren’t hit with a large payment after your policy is audited. 

One-Way or Two-Way Auditable

When you initially choose your policy, be sure to check the paperwork (and have your agent help clarify) whether or not the policy is two-way auditable. If it is two-way auditable, it means a carrier can actually refund the business owner partial premiums if you were charged too much. A one-way auditable policy means your rates stay the same and you're not compensated—even if you overpaid.

What if Your Business Hires Contractors/Subcontractors?

If your business hires contractors or subcontractors you need to make sure they provide you with a Certificate of Insurance (or certificates of insurance). If you do not show proof that they have this coverage, the auditor will be forced to include them under your insurance policy—which will increase your premium(s) at a significant cost to you. You should require contractors to provide you a COI for general liability insurance, workers' compensation, and sometimes certain bonds in case of insurance audits.

What Does an Audit Mean for Your Business?

So what does an audit mean for you? The bottom line is that you want to report your projections as accurately as possible when you’re completing an insurance application. Secondly, you should keep detailed payroll and accounting records. If you do these two things, insurance audits don't have to be scary. You may even find that the insurance company owes you money. 

If you need help preparing for an audit or simply have questions about what the process looks like when you're buying insurance, give us a call! We'll gladly help you review your data and connect you with an insurance company, whether it's for general liability, workers' compensation, or more.

 

Coverages You May Need: Workers' Compensation, General Liability Insurance, Professional Liability Insurance, Certificate of Insurance

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