Your premium audit questions answered
Premium Audits are required of some Business Insurance policies and they are specifically necessary for State Farm® Workers' Compensation and Contractors policies where your insurance is based on your payroll or total cost of the work you conduct during the policy period. The following are frequently asked premium audit questions and answers to explain the process.
A: A Premium Audit is a review of your business records for the policy period to obtain final actual payroll information or total cost of the work your subcontractors completed. This is to calculate the appropriate classification and final premium for your policy. State Farm conducts these Premium Audits using vendors and you will receive a letter prior to first contact from the audit vendor from State Farm letting you know which vendor will be conducting your payroll audit.
Here are documents that provide more detail on the audit process:
A: A final audit is a policy requirement of Contractors and Workers' Compensation policies and it is a standard practice in the insurance industry. For Workers' Compensation these final results are used in calculating your Experience Modification if your business is eligible for one.
A: Audits are conducted after the policy period ends or after the policy cancels. In most cases these are completed within 75 days after policy expiration. However, the insurance contract allows a policy to be audited up to 3 years after the policy expires.
A: Yes, as an audit must still be completed to obtain the final premium for your policy. Also, it is an obligation in the policy contract. If you do not comply with the audit, you may be accessed a penalty under Workers' Compensation called the Audit Non-Compliance Charge.
A: You will receive a letter from an Audit Vendor conducting the audit on behalf of State Farm that will outline the necessary records/information to complete the audit. Examples of some of the records that may be requested are: payroll journals/registers, general ledgers, quarterly employer tax documents, contractor/subcontractor records and the certificates of insurance for workers' compensation and/or general liability for all subcontractors used during the audit period.
A: After the audit is completed, State Farm will mail a Premium Adjustment Statement for every auditable policy where there is premium amount due or returned premium to the named insured on the policy. If the audit results in no change, we won't send a Premium Adjustment Statement. The Premium Adjustment Statement is for the previous policy term or a cancelled policy term.
Once the premium audit results are known for the previous or cancelled policy term, if you have a current term policy we adjust the policy based on those results.
A: When we verify payroll amounts we reconcile total payroll back to independent documents such as your quarterly 941 forms or quarterly UC-3 forms, so we need total payroll including all officers to perform that step.
A: In some states for Workers' Compensation insurance purposes you may be held responsible when an uninsured subcontractor's employee is injured. To protect your business, be sure to secure a Certificate of Insurance showing workers' compensation coverage from each subcontractor/independent contractor you use. If such Certificate of Insurance is not available at the time of audit, the subcontractor's total cost may be added to your payroll.
For Contractors policies it is also necessary to secure a Certificate of Insurance from each subcontractor you hire. It's important to ensure that the subcontractor you hire provides a Certificate of Insurance with coverage limits equal to or greater than your limits. Without a Certificate or an inadequate Certificate it may be necessary to classify these subcontractors as employees.
A: Premiums on auditable policies are determined on an estimated basis. If the initial estimated premium was higher than the actual premium at audit, you'll get a refund. If your initial premium estimate was lower than actual premium at audit, we'll let you know the difference you owe through a Premium Adjustment Statement. Changes in premium can result from changes in payroll and/or classifications applicable to your operations.
A: On expired policies if there is an amount due as a result of the premium audit it is all billed on the Premium Adjustment Statement. However, when we increase the estimate on the current term it will be billed in the same way as you are paying the premium on that policy. So if you make monthly payments the resulting premium increase will be spread over your remaining monthly payments for that policy.
A: You can certainly request to cancel your workers' compensation policy at any time during the policy period, however, there is an important factor to consider. When you cancel your policy a Short Rate Penalty may be applied to your premium in accordance with policy conditions and applicable state rules. It is important to consult with your agent should you need to cancel your policy in order to understand penalties that may apply. You should also consult with your legal counsel to confirm compliance with state law and if you are required to carry workers' compensation insurance.
If you couldn’t find the answer to your insurance premium audit question(s), contact your State Farm agent.