What is a premium audit? While it may sound scary, in reality it can help your business save money.
By Kelly Spors
When business owners hear the word "audit," they may naturally want to bury their head in the sand. But a premium audit isn't a bad thing.
What is a premium audit? In reality, it's a good thing: It makes sure the premium you're paying for a business insurance policy accurately reflects your business risk exposures — and it could potentially lower your premium.
All workers' compensation policies and many other types of business policies require premium audits as standard practice. Since business policy premiums are typically based on either your company's payroll and employee classifications or your gross sales, your insurer will want to see if those have changed since it first estimated them at the beginning of the policy's term and make any necessary adjustments to your policy's premium.
What Is a Premium Audit?
As your policy term reaches its end, your insurer will notify your business about the need to conduct a premium audit in the near future. You will be asked to submit certain documents by a specific date and answer general questions about your business and its employees.
For workers' compensation policies and other small business policies with premiums based on your payroll, some of the information you may be asked to provide could include:
- Recent quarterly 941 forms (federal employer tax returns)
- Recent Schedule C tax forms or other income tax forms
- 1099s and certificates of insurance for any independent contractor
- Details about company owners, officers and partners, including names, titles, where they work, percentage of stock owned in the company and earnings over the audit period
- Your company's general ledger or sales journal
For insurance policies based on gross sales, you'll likely need to provide your general ledger, cash receipts and sales tax records.
Once you've collected the required documents and company information, the audit process is usually relatively quick and simple. Your insurer may allow you to upload your documents using a secure online portal. In some cases, the insurer may send someone to your location.
The insurance company will be looking to see if your actual payroll or sales figures matches up to what it estimated for the policy's term. It will also be looking at employee classifications and numbers, as well as any independent contractors or subcontractors you work with. Keep in mind that in some cases, contractors may be eligible for coverage under your workers' compensation policy.
If the true payroll or sales numbers are higher than what was originally estimated, your premium will likely go up. If they're lower, the premium will likely go down.
You should find out the outcome of the audit — and whether your premium is changing — within a few weeks after you provide the necessary information to your insurer.
The Upshot of a Premium Audit
Yes, a premium audit could result in you paying a higher premium for your workers' compensation policy or other business insurance policy — but you could also end up with a lower premium or no change.
Ultimately, it's a comfort knowing your insurer is making sure your business insurance polices are appropriately designed and priced to provide the coverage your business needs.
Other articles in this series:
Workers' Compensation: 5 Tips for Surviving a Premium Audit
Workers' Compensation: A Premium Audit Checklist
The information provided in these materials is intended to be general and advisory in nature. It shall not be considered legal advice. The Hartford does not warrant that the implementation of any view or recommendation contained herein will: (i) result in the elimination of any unsafe conditions at your business locations or with respect to your business operations; or (ii) will be an appropriate legal or business practice. The Hartford assumes no responsibility for the control or correction of hazards or legal compliance with respect to your business practices, and the views and recommendations contained herein shall not constitute our undertaking, on your behalf or for the benefit of others, to determine or warrant that your business premises, locations or operations are safe or healthful, or are in compliance with any law, rule or regulation. Readers seeking to resolve specific safety, legal or business issues or concerns related to the information provided in these materials should consult their safety consultant, attorney or business advisors.
The Hartford¨ is Hartford Fire Insurance Company and its affiliated property and casualty insurance companies, 690 Asylum Avenue, Hartford, CT 06155.
Certain coverages vary by state and may not be available to all businesses. All Hartford coverages and services described on this page may be offered by one or more of the property and casualty insurance company subsidiaries of The Hartford Financial Services Group, Inc. In TX, this insurance is written by Sentinel Insurance Company, Ltd., Hartford Casualty Insurance Company, Hartford Lloyd's Insurance Company, Property and Casualty Insurance Company of Hartford, Hartford Underwriters Insurance Company, Twin City Fire Insurance Company, Hartford Accident and Indemnity Company and Hartford Fire Insurance Company. In CA by Sentinel Insurance Company, Ltd. (CA license # 8701) and its property and casualty insurance company affiliates, 690 Asylum Avenue, Hartford, CT 06155.
Automatic Data Processing Insurance Agency, Inc. (ADPIA) is an affiliate of ADP, LLC. All insurance products will be offered and sold only through ADPIA, its licensed agents or its licensed insurance partners; 1 ADP Blvd. Roseland, NJ 07068. CA license #0D04044. Licensed in 50 states. All services may not be available in all states. The Hartford¨ is one of ADPIA's carrier partners. ADPIA is not an exclusive agent for The Hartford¨. This information is not intended as tax or legal advice. If you have any questions, contact a tax or legal professional.
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