What is a Premium Audit?

What Is a Premium Audit?

A premium audit is a reconciliation of your insurance premium. Your insurance carrier should periodically audit your records to ensure your premium is as accurate as possible. Although the word “audit” may sound alarming, regular premium audits benefit everyone involved. They benefit you as less frequent audits can result in large amounts of premium being reconciled, and they benefit your insurance carrier by helping them understand the risk exposures present for your business. 

What Types of Insurance Are Audited?

The most common insurance that is audited is your workers’ compensation policy. This is because wages typically fluctuate and you may have a different number of employees than you did when your policy was purchased. The primary factors for workers’ compensation premium are payroll and classification of labor. Because of this, workers’ comp audits typically involve payroll documents, your tax or financial records to verify those payroll documents, and questions or observations about your employees’ duties. 

Although less common, general liability is also an auditable insurance policy. The primary factors for general liability premium are gross revenue and classification of your business. Because of this, general liability audits typically involve financial records that verify your gross sales as well as questions or observations about your business operations. 

Will I Be Audited?

Generally speaking, you should be prepared for an annual audit for your workers’ compensation and general liability policy premiums. On occasion, audits could be required more or less frequently. Audits are usually conducted when you or your carrier cancels your policy early as well. In some cases, your state may conduct an audit of your insurance premium or they may require your insurance carrier to audit you within a certain timeframe or using a specific method (such as physically visiting your business). 

What Do I Need for My Premium Audit?

Although audit requirements may vary by insurance carrier, we would recommend you have:

  1. Payroll records (overtime, doubletime, tips, and other special types of pay should be separated on these reports)
  2. Employee job duties
  3. Tax documents that verify payroll and revenue (W-2s, 1099s, 941s, state quarterly unemployment tax filings, federal tax filings)
  4. Gross receipts statement
  5. Description of the company’s operations
  6. General ledger and/or profit and loss statement
  7. Certificates of insurance for any subcontractors used
  8. In rare circumstances, your carrier may request bank statements or other documents/information

What Happens After a Premium Audit?

If your audit reveals less exposure (either payroll for workers’ compensation or sales for general liability) than estimated, you would be entitled to a return of premium. This return of premium would take the form of a refund or credit on your new policy. If your audit reveals more exposure, there would be an additional premium due. Most carriers allow a specific timeframe to pay them back, and they might negotiate a payment plan with you for this amount due. 

How Do I Avoid a Large Amount Due/Refunded at Audit? 

The best way to avoid a large amount of premium being reconciled at premium audit is accurately estimating your risk exposure when purchasing your policy and keeping your agent or carrier updated on any changes that occur while your policy is in effect. For example, if your company hires 5 additional employees or is contracted much more than typical, you should reach out to your agent who can endorse your policy with this increased exposure. 

If you have any further questions, it is always best to contact your insurance agent or broker directly. At Oyster, we strive to make insurance accessible. Please contact our experts regarding all of your commercial insurance needs.  

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