What is an Insurance Audit?
When business owners hear the word audit, they automatically engage stress mode. Income audits, which are conducted by the IRS on millions of individuals and companies each year, are entirely different from the ones handled by insurance carriers. The negative connotations associated with the term “audit” makes for plenty of confusion for both parties, so efforts should be made to understand the difference.
Why You Were Contacted for an Audit
Every state requires employers to carry workers’ compensation and general liability insurance. The former is designed to protect employees and their employers from the costs accrued by on the job accidents. It is meant to cover medical expenses, wages paid during periods of unemployment, and in some cases payments to beneficiaries in the event of death. Liability insurance protects a company’s assets, including their products and the potential risk of accidents to third parties.
An annual premium audit is a required condition in nearly every commercial insurance policy, but this does not mean the carrier will conduct an audit each year for all customers. Some businesses go 20 years without being audited, but it is important to note that the possibility always exists.
The purpose of workers’ compensation and general liability audits is to ensure the insured did not over or under pay on their policy. Work comp policies are always rated on the amount of payroll an employer has in a given year, while liability policies are based on payroll, sales, or other conditions (e.g. production costs, square footage of office building, etc.). Since there is no way of knowing at the beginning of the policy term what these costs will be, all policies are written on estimated amounts.
How the Audit Process Works
Therefore, the audit is conducted retroactively upon policy expiration to offset the difference. If an employer estimated $200,000 in wages and ended up having only $150,000, than they will likely receive a refund from their insurance carrier.
Regardless if you owe additional premium or are due a refund, the audit is a legal condition of your insurance policy. Failure to participate may result in higher premiums or policy termination. At Burches Bookkeeping, we have helped hundreds of companies with their auditing needs.