What is a workers’ compensation insurance audit?

Insureon Staff.
When you own a workers’ compensation policy, your small business may change and look different from what you originally expected when you gave your estimates. Learn about what to expect when your insurer performs an audit on your workers' comp coverage.
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Workers’ compensation insurance covers your employees’ medical expenses and lost wages when they suffer a work-related illness or injury. This makes workers’ comp one of your most important small business insurance policies. In fact, most states require that all small businesses carry workers’ comp insurance.

Since it's normal for businesses to add and lose employees, your insurance carrier needs to make sure you have the right level of coverage for your business. Each year, your insurer will perform a workers’ comp insurance audit to confirm that you paid for the appropriate workers' comp coverage over the previous year.

Why is a workers' comp insurance audit needed?

Workers’ compensation coverage is based on the number of employees, your payroll, and the level of risk involved in your day-to-day business operations.

As a small business, these metrics can change constantly — you may hire more web developers for your tech startup, or give your baristas a raise after a successful year for your coffee shop.

When you sign up for a workers’ compensation policy, you give your insurance company your estimated payroll for the upcoming year. They use this to determine your initial premium. However, by the end of the policy period, your company may look different from what you expected when you gave your estimates.

A workers’ comp audit checks all of your current business metrics and compares them to your estimates (or the results of last year’s audit). Your insurance company uses this audit to adjust your premium for the previous policy term based on your actual payroll to make sure you’re paying for all the coverage you need.

What to expect during and after a workers’ comp premium audit

Typically, workers’ comp audits happen annually or when you cancel your workers' comp policy. Most of the time, you can complete your audit over the phone and online. However, some insurance companies and states may require a physical audit instead.

The audit process typically takes 30 days to complete. Here’s what to expect when it’s time for your next annual audit:

  1. Your insurance company will inform you that it’s time for your annual audit.
  2. The auditor will reach out to you by phone or email with instructions for how they’ll conduct the audit, which records you’ll need, and how to submit them.
  3. You’ll submit your payroll information and answer any questions from the auditor.
  4. Your insurance company will inform you of any changes to your premium.
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How are costs calculated for a workers’ comp policy?

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During the audit, your insurance company will evaluate a number of factors about your business to determine if your premium should change, including:

  • Payroll
  • Location
  • Number of employees
  • Industry and risk factors
  • Coverage limits
  • Claims history

Workers’ compensation insurance costs a median of $47 per month. 30% of Insureon's small business customers pay less than $35 per month for this policy.

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What happens if you ignore a workers' comp audit?

Disregarding a workers' comp audit can bring about severe penalties for your business. Neglecting to participate in a workers' comp audit violates the conditions of your agreement with your insurance provider, and can result in any or all of the following actions:

  • Cancellation of your workers' comp policy coverage
  • Financial penalty
  • Inability to acquire future insurance coverage
  • Legal action

Given that the penalties for not complying with a workers' compensation audit can be daunting for you and your business, it is important that you respond to any audit inquiry and prepare for it accordingly.

How to prepare for a workers' compensation audit

You can make the process for a workers’ comp audit a lot easier by being prepared. You should keep detailed and organized records that you can easily access for the auditor. If you aren’t sure what records you’ll need, you can follow this simple workers’ comp audit checklist.

  • Payroll records. You should include each employee’s compensation as well as any changes in compensation over the last year.
  • Employee records. These should include each employee’s job description and class code. Insurers use these classification codes to determine each employee's level of risk based on their job duties.
  • Cash expenses. Your auditor will want to see your company’s cash flow, expenses, cash disbursements, and general ledger.
  • Tax reports. Include employee W-2s and 1099s for all employees and independent contractors plus Form 941, Form 944, and other federal tax return forms for your company.
  • Certificates of insurance for any subcontractors who have worked for you over the last year. If the subcontractors do not have workers’ comp, they’ll be included as part of your payroll.

What happens after a workers’ compensation premium audit

Your auditor will notify you when your audit is complete. Your insurance company will use the information they gathered during the audit to update your workers' compensation premium and coverage, should something need to change with your policy.

You’ll typically receive an audit summary from your insurance company explaining what the audit found and how your insurance premium will change.

If the audit found that your policy premium was too low, you’ll have to pay the difference in premium. Your insurance company will likely give you some time to make the additional premium payment.

On the other hand, if you overpaid for workers’ compensation insurance over the previous year, your insurance company will issue a refund for the difference.

The findings of the audit also determine how much you’ll pay for the next year.

Insureon can help before and after a worker’s comp audit

If your workers’ comp audit caused your rates to go up, you might want to search for a few quotes to make sure you’re still paying the best rate. You can compare quotes from top-rated U.S. carriers with Insureon’s free online application.

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