8 Common Questions About an Insurance Audit

As a contractor, you know worker’s compensation (WC) and general liability (GL) insurance policies are necessary. Because premiums for these policies are based on an estimate of your payroll and/or sales, which can change from year to year, insurance companies will perform an audit at the end of the policy period to make sure they collect enough money to cover your risk for the prior policy period. It can be unsettling any time your books are being scrutinized by an outside party, but an insurance audit is done to settle up on what is owed.  Do you wonder why this is necessary or what is involved? Let’s take a look at some common questions we receive about insurance audits to make sure you’re prepared for one when the time comes.

    1. Why are audits performed? Insurance premiums are largely based on risk exposure, and in the case of worker’s compensation or general liability insurance policies, that exposure is measured by the insured’s payroll and/or gross sales. Because payroll and gross sales are always fluctuating, premiums are estimated at the beginning of the policy period. At the end of the policy period, an audit is performed and the insured either receives a refund or owes more money depending on where original estimates were from the actual figures.
    2. Where does the audit take place? An audit will occur either at the insured’s place of business, their residence or, in some instances, where the payroll or sales records are kept (such as a bookkeeper’s or accountant’s office). The auditor will send a notice of the date and time that he or she will be on site (which you can change, if necessary). The insurance company may decide to forego an in-person audit and send you a self-reporting form to complete and return to them. It all depends on the size of your company, the ease of your prior audits, whether you use an automated payroll service (Paychex or ADP, for example), etc.
    3. When does the audit occur? The audit will be conducted annually, typically 30-60 days after the policy period ends.
    4. What happens during an audit? Each audit is unique. During an in-person audit, an auditor will arrive at the pre-determined location and will need a quiet place to review your information. He or she will look at sales figures and total payroll. The insurance term is remuneration, which includes such things as straight time pay, bonuses, sick time, holiday pay, etc. It does not include severance pay or the “half” portion of overtime pay. The auditor will also look at the subcontractors you have paid over the year and whether or not you have a current COI for each one. Important to note: If you don’t have a subcontractor’s COI, you will be charged for his or her worker’s compensation and general liability. This can add up to significant dollars.
    5. How do you prepare for an audit? Locate a clean, quiet area for the auditor to use while he or she is on site. Gather all of the information your insurance company requested (including but not limited to payroll records, sales records, tax forms, your subcontractors’ certificates of insurance, etc.) for review. Remain on-site or designate someone with knowledge of your records to stay on site to answer questions on the day of the audit.
    6. Is it possible to dispute the findings of your audit? Yes; in fact, Mason & Mason disputes about 20% of the audits that are billed each year. Usually, most disputes are related to the validity or lack of subcontractors’ certificates of insurance and how the auditor wants to classify certain employees or subcontractors.
    7. What happens if my exposure changes during the year? If you find that your sales have exploded midway through the policy period or that your payroll dropped significantly due to a layoff, having a discussion with your agent can be worthwhile. The original payroll or sales estimate can be adjusted midterm but only if you inform your agent to make the change. If sales explode and no notice is given to your agent, you may have a hefty audit premium due. On the other hand, some GL policies are set at a minimum premium with your original payroll/sales estimate. So if you are going to fall short on your estimates, it is very important to address this midterm change, the key is open communication with your agent.
    8. What are “payasyougo” premiums and do they eliminate the need for an audit? The majority of new WC policies are on a monthly or weekly payroll reporting basis, otherwise known as “pay-as-you-go”. This means that each pay period, you or your payroll company report your company’s payroll to the insurance company and you pay exactly what you owe based on the reported payroll. This option can be great for your cash flow. “Pay-as-you-go” does not eliminate the need for an annual audit. An audit is still performed to verify your payroll/sales at the end of the policy period and confirm that each sub has provided a COI.

Insurance audits don’t have to be stressful. By keeping accurate and up-to-date records and ensuring you have COIs for each of your subcontractors, you’ll find insurance audit time is just another day at the office. Of course, if you have any questions during your audit, feel free to reach out to Mason & Mason or your insurance broker/agent for help.