Many business insurance policies are issued using estimated information. This is especially common with Workers’ Compensation policies and, in some cases, General Liability policies. At the beginning of the policy term, the insurance company calculates the premium based on estimated payroll, gross sales, revenue, or another rating factor.
However, businesses can change throughout the year. Payroll may increase or decrease. Sales may be higher or lower than expected. Employees may take on different duties, or the business may add new services. Because of this, the premium charged at the start of the policy may not match the business’s actual exposure by the end of the policy term.
That is where an insurance audit, also called a premium audit, comes in.
A premium audit is a review completed by the insurance company, or an auditor working on its behalf, after the policy period ends. The audit compares the estimates used to issue the policy with the actual payroll, sales, revenue, or business operations during the policy term. The purpose is to determine the final premium.
Why Are Premium Audits Done?
Insurance premiums are based on risk. For Workers’ Compensation insurance, that risk is often tied to payroll and employee classifications. For certain General Liability policies, the premium may be based on gross sales, payroll, subcontractor costs, or another measure of business activity.
Since the insurance company does not know your final figures at the start of the policy term, it uses estimates. At the end of the term, the audit verifies the actual figures.
For example, if a Workers’ Compensation policy was issued based on an estimated annual payroll of $500,000, but the actual payroll was $600,000, the insurance company may charge additional premium. If payroll was lower than estimated, the business may receive a return premium or credit, depending on the policy terms.
In simple terms, the audit helps answer this question: Did the premium charged at the beginning of the policy accurately reflect the business’s actual activity during the year?
What Information Is Reviewed?
The auditor may request records to confirm payroll, sales, or operations. These may include:
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Payroll reports
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Quarterly tax filings
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Federal or state tax forms
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Profit and loss statements
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General ledgers
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Sales or revenue records
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1099 forms
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Certificates of insurance for subcontractors
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Employee job descriptions or duties
For smaller businesses, the owner may be asked to complete a voluntary audit. In this type of audit, no auditor comes to the business premises. Instead, the owner is sent one or more forms to complete and return in a timely manner.
The insurance company may also ask for supporting documentation to confirm the numbers provided. This could include an annual statement prepared by a bookkeeper, payroll service, or CPA showing the total payroll for the year, as well as a breakdown by employee. Providing complete and accurate information can help avoid delays, follow-up requests, or estimated audit charges.
For a Workers’ Compensation audit, the auditor may also ask what each employee does. This helps confirm that payroll is assigned to the correct classification. Different job duties can carry different levels of risk, which may affect the premium.
For a General Liability audit, the auditor may focus more on sales, revenue, subcontractor costs, or other rating factors listed in the policy.
How Can an Audit Affect Your Premium?
After the audit is completed, the insurance company determines whether the original premium was accurate.
If actual payroll, sales, or revenue were higher than estimated, the business may owe additional premium. If the actual figures were lower than estimated, the business may receive a return premium or credit, subject to policy terms and minimum premium requirements.
An audit may also identify changes in business operations. For example, if a company added a new service, hired employees for different types of work, or used uninsured subcontractors, the final premium could be affected.
This is why it is important to notify your insurance agent during the policy year if your business changes significantly.
What Happens If You Do Not Complete the Audit?
Although the audit process may feel inconvenient, it is important to cooperate with the auditor. If the insurance company cannot obtain the correct information, it may complete an estimated audit.
An estimated audit means the carrier uses estimated figures instead of verified records. This can result in a significant increase in premium — sometimes up to 200% of the original premium, depending on state regulations and insurance company rules.
Audit non-compliance may also create problems with current or future coverage. In some cases, policies may be cancelled or nonrenewed if the audit is not completed.
How to Prepare for a Premium Audit
Good recordkeeping can make the audit process easier. Businesses should keep organized payroll, tax, financial, and subcontractor records throughout the year.
To prepare for an audit, review the request carefully, gather payroll and financial documents, be ready to explain employee duties, keep certificates of insurance for subcontractors, and respond promptly to the auditor’s questions. If you are unsure what is being requested, contact your insurance agent for guidance.
If you receive a voluntary audit form, do not ignore it. Complete the form as accurately as possible and return it by the requested deadline. If supporting documents are requested, include records from your bookkeeper, payroll service, CPA, or internal accounting system that clearly show payroll, sales, or other requested figures.
A premium audit is a normal part of many Workers’ Compensation and General Liability policies. Providing accurate information helps ensure your final premium reflects your actual business activity. Failing to complete the audit may lead to estimated charges, additional premium, or possible policy cancellation.
At E. R. Munro and Company, we help businesses understand their insurance coverage and navigate important policy requirements. If you have questions about a premium audit or how your business insurance premium is calculated, our team is here to help.
