This information is provided to help you save money at audit time, and possibly avoid a large additional premium.  Your policy may be subject to verification of your payroll or gross sales (receipts) records at the expiration of your policy through an audit process.  We want to make certain you are completely aware of the potential of this process.  Helping you make sure your premium remains fair and as low as possible is our goal.

When, and why, is an audit necessary?

An audit is necessary after the expiration of a policy, which has an estimated variable premium base, such as payroll or sales.  It is necessary to determine the correct exposure or premium base for the insurance coverage provided for the policy period.

The original premium on your policy was an estimated premium.  The final audit determines the actual premium.  When actual exposures differ from estimated exposures an adjustment must be made to the premium of the expired policy, either up or down.

How should your records be kept?

Proper record keeping will permit the auditor to apply any allowable credits to your final premium, then the auditor requests payroll information, this means remuneration.  Remuneration means money or any substitute for money.  To obtain proper credits, your books should reflect the following:

            Overtime:  In most states, the amount paid in excess of straight-time pay can be deducted if the excess is verifiable in your records.  You must show overtime pay separately by employee and in summary by classification of work.  If this is done, the auditor will be able to make deductions from your payrolls.  Without the proper breakdown, no overtime deduction can be made.

            Division of Payroll:  Generally, a division of an individual employee’s payroll to more than one classification is not allowed, except for construction or erection workers.  In these cases, the payroll may be allocated to each type of work performed if proper records are kept.  Your records must show the number of hours and the amount of payroll for each type of work.  Without an adequate breakdown, the full payroll must be charged to the highest classification.  If you are a contractor, and your exposure is based on the number of employees, it will be necessary for the auditor to determine the actual number of days that each employee worked during the policy term.  This is required to assure that your policy premium will adequately reflect the actual exposures.

            Subcontractors:  All subcontractors that you use must provide you with current certificates of insurance proving they have General Liability insurance as well as Workers’ Compensation insurance for the time that work is performed.  The limit of liability from each of your subcontractors should equal the limit on your liability insurance policy.  If the certificates of insurance are not available for review, the subcontractor amounts must be treated as payroll, and appropriate premium charges will be made.

Sales (receipts) Records:  If your policy is based on gross sales, the records need to be separated by location in order for us to be able to rate your policy properly.  There are some allowable deductions from the total sales.  These include: 

  • Sales and excise taxes collected and submitted to a government division
  • Credits for repossessed and returned products, including allowances for spoiled & damaged goods
  • Royalty income from patent rights or copyrights that are not product sales
  • Freight charges on sales, if freight is charged as a separate item on the customer’s invoice

Note:  If an audit is needed, the above information represents the general issues that are in effect in most jurisdictions.  There are exceptions to these rules that may apply.