Understanding the insurance premium audit process
As a business owner, you may be contacted to complete an insurance premium audit. Learn what the insurance audit process entails and how to help prepare.
Insurance premium audits are a vital and routine part of a business owner's workers' compensation or artisan and service contractors insurance policy. For business owners, understanding the insurance premium audit process may feel overwhelming. However, understanding this process is necessary to help determine final exposure for your policy. Learn what an insurance audit entails, what occurs during the process, why it's necessary and how to help prepare for it using an insurance audit checklist.
What is an insurance audit?
When you start a new business, obtaining an insurance policy is an important first step. Once your policy has been issued, your premium is calculated based on the business type and wages employees and artisan contractors are paid. At the end of your policy period, an insurance audit is conducted by an insurance company to ensure that the premiums you’ve paid over a policy period accurately reflect your business’s risk exposure and operations. The purpose of the premium audit process is to produce the final bill of actual exposure so that the premium aligns with the actual operations and payroll data vs. the estimates provided at the policy's inception.
Details that can change the premium amount include the actual amount paid to employees, subcontractors or fellow artisans and can also include bonuses or employer provided housing.
Similarly, you'll need certificates for workers’ compensation or 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, you will be notified about which audit vendor will facilitate the audit process before the end of your policy term. 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. All audit information provided to State Farm and its representatives will be kept confidential. State Farm will also need a complete description of your business operations to confirm the classification codes on your policy are correct.
Why is a premium audit needed?
Insurance companies perform insurance audits to help meet policy requirements in insurance premium calculations. They serve a critical function by adjusting premiums to accurately reflect business activity levels and exposures to risk, which can change yearly. If your business grows, expands or engages in different operations than initially stated, your insurance premiums may also change.
This process can sometimes result in a returned premium if your business estimate was higher than the actual final premium at the end of the policy term. Or an additional premium may be needed if there was greater exposure than initially estimated. If you do not comply with the premium audit requirements, your insurer could cancel your policy due to an unobtainable audit potentially resulting in a lapse in coverage.
Insurance audit checklist
An insurance audit doesn't have to be stressful. Here's an insurance audit checklist to help guide the way:
- Maintain accurate and up-to-date payroll records, including overtime and the type of work performed.
- Organize certificates of workers compensation and liability insurance for subcontractors, as these can impact your liability and premiums.
- Keep detailed sales records available for review, this can correlate with your exposure and risk levels.
- Document and categorize all business operations, including any changes since the policy inception, which will be essential for the auditor to help determine the correct classifications for premium purposes.
- Proactively answer common insurance audit questions by having clear explanations prepared for any discrepancies or changes in your business operations over the last year as well as any changes in officers or owners.
Stay in touch with your agent to help ensure all proper documentation has been obtained and ask questions when you are unsure. Inform your agent of any changes in your payroll and business operations throughout the year that could affect your premium.
Navigating the insurance premium audit process can be complex, but with a clear understanding and proper preparations, it can be managed effectively.
You can check out the additional info we have to help your small business, or if you're ready to get a small business insurance quote, give us a few details and a State Farm® agent will reach out to you.
This article was drafted with the help of AI and reviewed by State Farm editors.
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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