Insurance audits are a normal part of many commercial insurance policies, especially General Liability and Workers’ Compensation. These policies often start with estimated payroll or sales, and the insurance company conducts an audit at the end of the policy period to verify the actual numbers.
While most audits are routine, the reality is that many business owners make simple mistakes during the audit process that can result in unexpected additional premium. In many cases, these issues are preventable if you know what the insurance company is looking for. Below are three of the most common audit mistakes we see.
Mistake #1: Not Having Certificates of Insurance for Subcontractors
This is one of the biggest surprises for contractors during an audit. If your business pays subcontractors and those subcontractors do not provide proof of their own insurance, the insurance company may treat them as employees for audit purposes.
That means the payments made to those subcontractors can be added to your payroll or exposure calculations, which can significantly increase your premium. The best way to avoid this issue is to collect and keep Certificates of Insurance from every subcontractor before work begins. Those certificates should show they carry their own General Liability and Workers’ Compensation coverage.
Mistake #2: Poor Record Keeping
Auditors typically request documents such as payroll reports, quarterly payroll tax filings, profit and loss statements, and general ledger reports. If these records are incomplete or disorganized, it can slow down the audit process and sometimes lead the auditor to make assumptions about exposures.
Keeping accurate financial records and maintaining organized documentation throughout the year makes the audit process much smoother and helps ensure the insurance company is working with the correct numbers.
Mistake #3: Ignoring or Delaying the Audit Request
When an audit notice arrives, some business owners put it aside or delay responding because they are busy. Unfortunately, ignoring the audit request can lead to a much bigger problem.
If the audit is not completed, the insurance company can issue an estimated audit, where they estimate payroll or sales instead of using actual numbers. These estimates are often much higher than the real figures and can result in a significantly larger premium.
Responding to the audit request promptly and providing the requested information helps ensure the audit is completed accurately.
The Bottom Line
Insurance audits are simply a way for the insurance company to finalize the premium based on actual business activity. When records are organized, subcontractor certificates are collected, and audit requests are handled promptly, the process is usually straightforward.
If you ever receive an audit notice and are unsure what information is needed, our office is happy to help guide you through the process and make sure everything is handled correctly.