Two business owners preparing for the insurance audit.

Understanding the insurance premium audit process

As a business owner, you may be contacted to complete an insurance premium audit. Learn what that is and how you can be ready.

Insurance premium audits are a vital and routine part of a business owner's Workers' Compensation or Artisan and Service Contractors insurance policy. Since the cost for these auditable policies are based on the wages employees and artisan contractors are paid, the insurance audit is necessary to make sure business owners are fairly and accurately charged for the coverage.

What is an insurance audit?

When the Workers' Compensation or Artisan and Service Contractors policy was issued, the premium was based on an estimate of business operations and workers' payroll. As a result, at the end of the policy period, an audit should be performed on the actual payroll and business operations so a final premium amount can be calculated.

Employment details that can change the premium amount include the actual amount paid to employees as well as temporary employees, subcontractors or fellow artisans.

For instance, if a temporary employee's payroll and additional forms of compensation such as sick days and commission cannot be determined from your business records, the premium could include calculations using the total cost of the contract with the temporary employment firm.

Similarly, you'll need Certificates of Liability Insurance for subcontractors you hire. Without obtaining these documents, the subcontractor and their employees may be included in your premium calculation. This could increase your premium substantially.

What can I expect during the insurance premium audit?

If you're insured with State Farm®, a State Farm representative or your agent will notify you about which audit vendor will be facilitating the audit process. Then the State Farm vendor or State Farm representative will contact you via mail, telephone or visit with you in person to obtain your financial records.

The financial records requested will include payroll logs, general ledgers, profit and loss statements and tax returns. Be assured that all audit information provided to State Farm and its representatives will be kept confidential. State Farm will also need to have a complete description of your business operations to confirm the classification codes on your policy are correct.

Because business can fluctuate throughout the year, your hiring needs may be very different than estimated. As a result, you could be due a refund if you hired fewer employees or you could owe more premium if you added employees.

Insurance audit best practices to help save time and money

  1. Records by employee and type of work – A regular business practice that will benefit you during a Workers' Compensation or Artisan and Service Contractors premium audit is to have your accounting records set up by employee and the type of work they perform.
  2. Certificates of Liability – If you hire any subcontractors during the year, be sure you obtain Certificates of Liability Insurance and keep them with your records.
  3. Timely completion of audit – Consider scheduling time to attend to the matters relating to the insurance audit so that you can respond in a timely manner to the audit process and avoid any payment conflicts that may impact your credit.
  4. Stay in touch with your agent – Make sure your State Farm agent understands what your business is all about and who is doing the work. Keep in contact with your agent throughout the year to inform them of changes to your payroll and business operations that could change your premium.

The information in this article was obtained from various sources not associated with State Farm® (including State Farm Mutual Automobile Insurance Company and its subsidiaries and affiliates). While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. State Farm is not responsible for, and does not endorse or approve, either implicitly or explicitly, the content of any third party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. State Farm makes no guarantees of results from use of this information.

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