Businesses buy general liability and workers compensation insurance using estimated figures at the start of the policy term. The carrier uses estimated payroll, sales, or subcontractor costs to calculate premium. At the end of the term, the carrier checks what actually happened. This review is called an audit.
An audit is not optional. It is part of every workers compensation policy and most general liability policies. Its purpose is to make sure the premium reflects the real level of exposure. If business activity was lower than expected, the premium may go down. If activity increased, the premium may go up.
Audits are not meant to be disruptive or adversarial. The carrier wants accurate information so the business pays the correct amount.
Why Audits Matter
Business conditions change during the year. Payroll can increase, sales can rise or fall, and subcontractor usage can vary. If actual exposure differs from the estimate, premium needs to be corrected. Accurate records help protect the business from unnecessary charges.
Many audits result in additional premium because payroll or sales increased. However, if a business had a slow year, the audit can create a credit.
What to Expect
Audits can be done in person, over the phone, or online. The format varies, but the information needed is similar. The carrier or auditor will request actual payroll and sales figures for the full policy term and supporting records.
Subcontractor information is frequently reviewed. If a subcontractor does not carry their own insurance, the carrier may treat them as if they were employees. This can have a major impact on premium unless proper documentation exists.
What You Should Have Ready
General liability audits may request:
- Gross annual sales
- Payroll broken out by job type if payroll is an exposure basis
- Subcontractor expenses and certificates of insurance
Workers compensation audits may request:
- Payroll for each employee for the full policy term
- Payroll separated by class code if applicable
- Identification of clerical, sales, and field payroll
- Subcontractor records
The audit is easier when payroll and sales records are organized and when each subcontractor has a current certificate of insurance on file.
How to Prepare Throughout the Year
You can make the audit process simple by:
- Keeping payroll organized and tied to job type
- Saving quarterly payroll reports
- Tracking sales by accounting period
- Retaining certificates of insurance for all subcontractors
- Recording any changes in operations or service types
- Separating overtime so proper wage adjustments can be made
Staying organized throughout the year is much better than trying to gather documents after the fact.
If the Audit Results Do Not Look Right
Sometimes an audit produces a premium change that seems off. Review the following:
- Were employees placed in the correct class codes
- Were clerical and outside sales payrolls separated
- Did the carrier include uninsured subcontractors correctly
- Were materials or non-labor costs mistakenly counted as labor
- Were job descriptions misunderstood
If something is incorrect, ask the auditor or carrier for clarification. Premium adjustments can often be revised when supported by records.
Final Notes
A policy audit is a normal part of workers compensation and general liability insurance. It is not a penalty or a surprise, and it should not be stressful if records are well maintained. The goal is accurate premium based on the actual level of business activity.
