Premium Audit FAQs
What is a premium audit and why is this process necessary?
For some policies, the amount you were initially charged depends upon the annual payroll or sales that were estimated before coverage started. A premium audit is a means of verifying the premium you were charged by reviewing your records and operations after coverage has expired (or upon cancellation) to determine the actual risk exposure and make any adjustments. In some cases, you may owe more money; in others, you'll get some back!
All Workers' Compensation policies are subject to a mandatory audit required by law as well as some Businessowner's Policies (BOP). If the liability component of your BOP coverage was based on either payroll (which is typical of construction contractors) or sales (which is typical of restaurants), insurance companies may need to audit that policy as well.
The audit process for all policies that are based on payroll is very similar. However, if you have just a BOP account and your exposure is based upon sales, the information below about payroll will not apply to you.
What information and records will be needed to complete the audit?
Payroll journals listing individual employee payroll records and job duties/responsibilities for the period listed on the audit form.
Your general ledger, check register, and cash disbursements journal.
Federal Quarterly Tax Returns (IRS Form 941) for the previous four quarters. (State Unemployment Quarterly Forms
are also acceptable.)
All Miscellaneous Income Forms (IRS Form 1099) for the most recently completed calendar year.
Workers' Compensation Certificates of Insurance (ACORD Form 25) for any subcontractors and owner-operators.
Any other records that may be requested by the auditor at the time of your audit.
How will this information be obtained?
Depending upon the size of your policy and/or nature of your business operations, one of three standard methods (outlined below) will be used to obtain audit information. Each approach has advantages. Whichever type is assigned, your cooperation can make the process simple, fast, and successful.
If you have been designated for a self-audit submission. . . .
You will receive a mailed notification that you audit is due prior to the expiration of your policy (or upon cancellation). This letter should be handled by someone familiar with your operations and authorized to release payroll data. At that time, the needed supplementary documentation (described above) should be sent to the insurance company via email or fax with a cover sheet.
If you have been designated for a telephone-audit interview. . . .
You will receive a preliminary notification of the information and records you will need to have on hand prior to the scheduled phone interview, which should be addressed by someone familiar with your operations and authorized to release payroll data. That individual may be asked to complete and submit some forms in advance. Then, either an in- house or third-party representative will call at the agreed upon time and date to complete the process. Supplemental documentation (such as tax materials) can be forwarded via fax, e-mail, and/or conventional mail.
If you have been designated for a physical-audit visit. . . .
You will receive a preliminary notification of the information and records you will need to have on hand prior to the scheduled visit. Then, either an in-house or third-party representative will come to your facility at the agreed upon time and date to complete the process while on your premises. To expedite, please appoint a primary contact person who is familiar with the work done by all departments/employees and who is authorized to discuss your payroll records.
To ensure accuracy, plan to have the insurance auditor review your records at your primary place of business. If payroll records are located at one or more secondary locations (such as your accountant’s office), have those documents forwarded to your primary place of business in advance. If the audit MUST be done off-premises due to extenuating circumstances, your designated contact person should either accompany the audit representative or be available by phone to talk about workplace exposures.
If I can’t keep a scheduled appointment, what should I do?
Contact the auditor as soon as possible with the following information:
Name and phone number of the policyholder (as shown on the policy).
Name of person to contact and his/her available hours (for rescheduling).
Location of audit (if different than the original one specified).
Do I have to provide the information requested?
According to the terms of your insurance contract and state regulations, an audit of your books and records is required to determine the correct premium charge for the insurance protection provided. In certain cases, you may find some premium will be credited or returned to you; in others, an additional amount might be due.
If I do not cooperate with the premium audit requirements of my policy, what happens?
If you do not cooperate, in most cases, the insurance carrier will have no choice but to estimate your payrolls which will result in a substantial increase of 100% or more of your original premium.
What is considered payroll/remuneration?
Premiums for Workers’ Compensation insurance are based on payroll, which is defined as total remuneration for services performed by an employee. In most states, remuneration means money or substitutes for money, including:
Wages/salaries and overtime.
Bonuses and commissions.
Vacation, sick, and/or holiday pay.
Tax deferred payments (cafeteria or 401K plans).
Rental value of an apartment or house furnished by the employer.
Car or tool allowances.
Any other substitutes for wages (such as store certificates, merchandise, etc.).
In determining the premium charged for Workers' Compensation coverage, are tips excluded?
Depending upon state laws, you may be eligible to exclude all or a portion of your tips and other gratuities from your total remuneration, but you must be prepared to provide verifiable documentation in your payroll records.
How is overtime handled?
In most states, a portion of overtime pay may be deducted, but you must be able to provide verifiable documentation by maintaining separate records for regular and overtime income for each employee.
What classifications will be used on my audit, and how will the payroll be separated?
When your policy was written, class codes were assigned based on the operations described within your application. Premium auditor will verify that information and address any changes that need to be made as a result of your business activities during the past year. The goal is to ensure that all employee duties are correctly classified and that all payroll is accurately charged according to state regulations.
As a sole proprietor, officer, or partner, can I elect to be included or excluded from coverage on my policy?
The answer to this question depends upon your state. When sole proprietors, officers, and partners are excluded from Workers’ Compensation coverage, the proper forms must be completed and filed prior to the inception date of your policy. When these individuals are included, the classification that most closely matches actual job duties will be assigned. As a result, you will be asked to provide a detailed description of each person’s responsibilities.
Do I have to list corporate officer wages even though they may be excluded from coverage?
Yes. Since audited amounts are verified against tax returns, insurance auditors need individual officer wages to confirm the appropriate amount to exclude.
What is a subcontractor? What is an owner-operator? How is this payroll handled?
A subcontractor is someone (other than an employee) who you hire to assist you in providing a product or service to your customer (and not just to you). An owner-operator is a person who operates a personally owned vehicle on behalf of your business. In each case, payment is made by some method (other than payroll), such as cash or a payable disbursement (i.e., IRS Form 1099).
Policyholder must provide a Certificate of Workers’ Compensation Insurance (ACORD Form 25) for each subcontractor and owner- operator. If adequate proof of coverage is not provided, payroll will be charged for the uninsured parties in your audit. This rule applies to all subcontractors and owner-operators, including those who are sole proprietors without employees who may not be required (or even able) to purchase Workers’ Compensation insurance.