When you hear the word “audit,” you might feel anxious. But fear not—an insurance audit is an entirely different beast from a tax audit. In fact, an annual insurance audit can benefit your business because it ensures you’re paying the right premium based on your actual risk.
An Insurance audit allows insurance companies to review your business’s actual numbers, like payroll and sales, against the estimates you provided when setting up your policy. Think of it as a financial health checkup. By confirming these figures, insurance carriers can make sure you aren’t overpaying or underpaying for your coverage.
Your insurance provider or an independent third party can conduct these audits. Don’t worry—your information is kept strictly for insurance purposes and won’t be shared with the IRS or other agencies.
Key Takeaways
- Insurance audits adjust your premium based on actual payroll and sales, ensuring you’re not overpaying or underpaying for coverage.
- Understanding the difference between one-way and two-way audits can help you identify opportunities to save on premiums.
- Proper preparation, including detailed payroll, sales, and subcontractor information records, can reduce surprises and speed up the audit process.
- Industry-specific audits, such as for workers’ compensation or general liability, require careful attention to classification codes and risk levels.
- Choosing a pay-as-you-go workers’ comp plan can help avoid annual premium adjustments and simplify the audit process.
How Does It Work?
The process starts with examining your business’s operations and financial data. Insurance companies will look at factors such as:
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- Payroll (including wages, bonuses, and benefits)
- Sales (actual revenue compared to projections)
- Number of employees
- Job roles and classifications
Each factor plays a role in determining your insurance premium for the coming year. For example, if your payroll increases due to hiring more staff, your risk exposure rises, and your premium may increase. On the flip side, if your business contracts and these figures decrease, you could be entitled to a refund or a reduction in your premiums for the next term.
At LoPriore, we see these audits as an opportunity for business owners to gain insights into their insurance needs. It’s a chance to adjust coverage and ensure that your policy aligns with your current operations.
One-Way vs. Two-Way Audits: What’s the Difference?
Insurance policies can vary in how they handle audits. Knowing the difference between one-way and two-way audits is important, as they affect whether you owe additional premiums or get a refund if your exposure is lower than expected.
- One-Way Audit: In this type of policy, if your actual exposure (payroll, sales, etc.) is higher than the estimate, you’ll owe more to cover the increased risk. However, you won’t get a refund if your exposure is lower. It’s a one-way street, so while the insurance company can ask for more money, they won’t pay you back if you overpaid.
- Two-Way Audit: This is the preferred option for businesses because it works both ways. If your exposure is lower than estimated, you’ll get a refund or credit for your next premium. If it’s higher, you’ll owe the difference. It’s a fairer option that adjusts your premium based on the actual data from your business.
Most businesses prefer two-way audits because they provide a safety net. Imagine you had a slow year with fewer sales and lower payroll. With a two-way audit, your insurance carrier will credit you for overpayment—saving you money. That’s why it’s essential to know what type of audit your policy includes.
What Are the Different Types of Insurance Audits?
Depending on your business’s specific coverage needs, insurance audits can vary. Each type of insurance looks at different metrics to assess risk and calculate premiums. Here are some common audits you might encounter:
Workers’ Compensation Insurance Audits
In Massachusetts and most states, workers’ comp insurance is mandatory for businesses with employees. The audit process for workers’ comp focuses primarily on payroll and employee classification. The risk of injury varies greatly depending on the type of work being done, affecting your premium. For instance, office workers are considered lower risk compared to construction workers, and their premiums reflect that difference.
During a workers ‘ comp audit, you’ll provide payroll records, job descriptions, and subcontractor information. If you’ve had a busy year and added employees, or if your employees took on more hazardous roles, this will likely increase your premium. On the other hand, if your payroll shrank, you might see a cost reduction for the next policy term.
Tip: Keep organized payroll records and ensure your subcontractors have their own workers’ comp coverage to avoid unexpected audit charges.
General Liability Insurance Audits
General liability insurance protects your business from claims related to bodily injury, property damage, and other liabilities. The audit for this type of coverage usually revolves around sales figures—specifically, how much revenue your business generated over the year.
For example, if your original policy was based on a projection of $1 million in sales, but you ended up making $2 million, your insurance company took on more risk than expected and will adjust your premium accordingly.
At LoPriore, we work closely with our clients to make sure they understand how audits work for general liability insurance, helping to avoid surprises when it’s time for the audit.
Preparing for an Insurance Audit: What You Need to Know
The key to a smooth insurance audit is preparation. Here’s a checklist of items you’ll need to gather ahead of time:
- Payroll records: Include bonuses, holiday pay, commissions, and other employee benefits.
- Sales records: Provide total revenue and details on the products or services sold.
- Subcontractor information: Make sure you have insurance certificates from any subcontractors you’ve hired.
- Tax documents: Include your W-2s, 1099s, and other relevant forms.
Designating one person in your company to handle the audit process is important. This person will be the point of contact for the auditor, ensuring that all questions are answered and documentation is provided promptly.
Pro Tip for Reducing Premium Surprises
Keeping detailed records throughout the year can prevent surprises during the audit. Additionally, choosing a pay-as-you-go workers’ comp policy can help you avoid significant adjustments at the end of the year by aligning your premium payments with your actual payroll in real-time.
Common FAQs About Insurance Audits
What if my audit reveals higher-than-expected sales or payroll?
If your actual figures exceed the projections, you’ll likely owe additional premiums to cover the increased risk. However, with a two-way audit, if your figures are lower, you’ll receive a refund or credit.
How often do insurance audits happen?
Most insurance policies are audited annually, but audits could occur more frequently depending on your business’s size and risk level. A pay-as-you-go workers’ comp policy could help you avoid significant adjustments at the end of the year by aligning your premium payments with your actual payroll in real time.
What if I disagree with the audit results?
You have the right to contest the audit if you believe there has been an error. In these cases, an insurance carrier may conduct an on-site audit or review additional documentation to ensure accuracy.
What documents are needed for an insurance audit?
Gather payroll records, sales figures, subcontractor information, and tax documents like W-2s and 1099s to prepare for an audit. These are essential for verifying business operations and ensuring accurate premium adjustments.
What can I do to avoid surprises in the insurance audit process?
Keeping detailed and accurate records throughout the year is the best way to avoid surprises during an audit. Designating a single person to handle audit communications and ensuring proper documentation for all subcontractors can also help.
Prepare for Your Next Insurance Audit with Confidence
Insurance audits may seem intimidating, but they are crucial for ensuring your business is accurately covered and paying the right amount for your insurance premiums. You can avoid surprises and save money by understanding the audit process, maintaining accurate records, and staying on top of key factors like payroll and sales. Whether it’s a workers’ compensation audit or a general liability review, preparing in advance will make the entire process smoother and more beneficial for your business.
Conclusion
At LoPriore Insurance, we specialize in helping Massachusetts businesses navigate their insurance needs, including preparing for audits. Contact us today to learn more about optimizing your coverage, reducing premium surprises, and ensuring your business is fully protected. Our expert team is here to answer your questions and guide you every step of the way.
Don’t wait—protect your business by preparing for your next insurance audit now!
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