Insurance Premium Audit Checklist

Business owners are commonly contacted about completing a remium audit after an insurance policy expires or is canceled. The audit process is designed as a service to you that guarantees you only pay the premium that you owe.

What is a Premium Audit?

The primary purpose of a premium audit is to calculate your final insurance premium. When your policy was issued, the premium was an estimate of an exposure basis (usually payroll or sales) multiplied by a rate. The rate used is determined by how the exposure base is classified. The audit will examine your records to establish the actual exposure basis and make sure that the correct classification codes and rates are used in determining your final premium. Because the original premium was an estimate, the audit will mostly likely result in a change of premium and/or classifications for your business.

Premium audits are commonly performed on General Liability, Liquor Liability and Workers Compensation policies. By auditing these policies, we can make sure that your business pays the correct premium. Typically, information from the audit will generate either a bill or a refund. In addition, the premium audit can provide valuable information about your business operations.

Types of Insurance Premium Audits

Physical Audit
A physical audit is an on-site review of your business records by an auditor. If your business records are located at an address other than your policy address, such as an outside accountant’s office, you will need to notify the auditor.

Mail Audit
If a physical audit isn’t performed, you may be asked to complete an audit through the mail. You will be asked to include supporting records, such as copies of tax reports. You may also have the option to complete your audit online.

Preliminary Audit (for Assigned Risk Pool Policies)
At the beginning of your policy term, the auditor will review a representative period in order to project the premium for the full policy term.

Information Needed for an Insurance Audit

Listed below is typical information an auditor may request at the time of audit. If there are multiple companies or multiple entities insured under one policy, the auditor will request this information for each company or entity.

General Information

  • Description of company operations
  • Officers’/Owners’ names and titles
  • Employee names and job duties
  • Number of employees at each location
  • Names of subcontractors and certificates of insurance for subcontractors

Payroll Records

  • Gross pay including, but not limited to: bonuses, commissions, holiday pay, sick pay, overtime pay, vacation pay and all pretax amounts
  • Pretax/Section 125 amounts/401(k) amounts
  • Overtime pay shown separately

Subcontractor Information

  • General ledger, cash disbursements book and checkbook register
  • Names of subcontractors and certificates of insurance for subcontractors

Tax Documents to Verify Payroll/Sales Records and Federal ID Number

  • 941, 940, 1099, W-2, W-3, income tax return, etc.

Sales

  • Gross sales for each type of service provided/work performed by location
  • Profit and loss statement
  • General ledger

Additional Information Typically Requested for Restaurant and Bar Audits

  • Tips shown separately
  • Number of free meals given to employees
  • Subcontractors providing live entertainment
  • Liquor sales and total sales to determine proper class for Workers Compensation

Insurance Premium Audit Definitions

Payroll
Payroll premium bases are used for Workers Compensation and Commercial General Liability policies.

Payroll includes, but is not limited to: hourly and salaried payroll, bonuses, holiday pay, sick pay, vacation pay, commissions, piece work and profit sharing. Also included in the payroll premium base are meals and housing provided for employees, allowances for hand tools, expense allowances
not based on receipts, and amounts used to reduce taxable wages such as cafeteria plans and deferred compensation plans.

Payroll excludes tips, overtime premium, severance pay (not accumulated vacation or sick pay paid out), expense reimbursements based on receipts, third-party sick pay, excess life insurance, personal use of a company auto and certain company perks (such as incentive vacations, club memberships or tickets to entertainment events).

Gross Sales
Gross sales premium bases are commonly used for Commercial General Liability and Liquor Liability policies.

Gross sales include, but are not limited to, total amounts charged for all goods and products sold and services performed.

Gross sales exclude sales tax, returns and allowances. Cash discounts are not excluded.

Subcontractors
You must obtain Workers Compensation and General Liability certificates of insurance for all subcontractors hired. If the subcontractor does not provide you with a certificate of insurance, they will be treated as your employee and a premium will be charged for them.

The premium for uninsured subcontractors can be substantial, so it is to your advantage to obtain proof of insurance from subcontractors.

Uninsured subcontractors covered under the principal contractor’s policy are classified on the basis of the classifications that would apply if the work were performed by the principal’s own employees.

For even more details, download this pamphlet on Understanding Your Insurance Premium Audit.

Still have questions? Contact your local Society Insurance agent to discuss or call 888-5-SOCIETY.

Author

As a mutual insurance company, we operate and exist for the benefit of our policyholders. For more than 100 years, Society has been helping businesses overcome the unexpected with comprehensive coverage packages and outstanding claims handling, underwriting and risk management.

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