Insurance Premium Audits For Contractors – How to Avoid Getting Overcharged in an Audit


WHAT DO CONTRACTORS NEED TO KNOW ABOUT PREMIUM AUDITS? Most contractors find they are subject to premium audits from insurance companies for general liability, workers compensation, and sometimes for automobile, and even builders risk insurance policies. This applies most types of contractors, including general contractors, plumbing contractors, heating ventilation and air conditioning (HVAC) contractors, electrical contractors drywall contractors, painting contractors, roofing contractors, and so on.

A premium audit is a review of your business operations, financial reports, and records to determine what to charge you for your contractor liability insurance, workers compensation, or other coverage provided. The objective is to determine the final earned premium for a given policy that was issued on the basis of payroll, sales, subcontracting costs, or other variables.

Policy premiums are based on projections you provided for payroll, sales, and perhaps subcontractor costs. Your insurance rates can vary based on this information, the audit determines what the correct premium should be based on your actual experience.

The audit is performed by an auditor selected by the insurance company. They may be an employee of the insurance company, or an employee of an auditing firm, or even an independent contractor.

THERE ARE THREE TYPES OF PREMIUM AUDITS. Depending on the size of your premiums and your operations you may get one of the following:

Physical Audit – Conducted at your premises or at a secondary location such as your accountant’s office.

Phone Audit – An auditor contacts you over the phone to complete the audit. This type of audit is generally for small- to mid-sized accounts.

Mail Audit – A voluntary audit form with instructions is mailed to you. Mail audits are generally conducted for smaller accounts.

RECORDS AUDITORS MAY ASK TO SEE: Auditors are likely to ask for one or more of the following types of records:

Journals and Ledgers

Tax filings Individual

Pay Records

Time cards

Vehicle titles

Contracts with clients

Contracts with subcontractors

Records of Job Costs

P&L Statements

Balance Sheets

QUESTIONS AUDITORS MAY ASK The auditor will likely ask questions about your records or operations. They may be asking questions to determine if the correct classifications are being applied. If an auditor decides your operations are not correctly classified, it can have an unwelcome surprising result of a large audit billing. Make sure you understand your classifications, and how the boundaries of your particular classifications are defined.

If an auditor questions the use of any classifications, they may ask to see some actual work being done by your employees.

It is important to understand credits you are entitled to in audits.

Insurance classification and rating rules often allow credits to your audit, but your records must be maintained to provide the necessary information in detail and summary form.

If premiums are payroll based, you will pay for total remuneration as defined in the policy.

Remuneration in most states, means money or substitutes for money, and includes:



Holiday Pay

Other Money Substitutes

Overtime Pay

Payments made to Profit Sharing Plans

Payments made to statutory benefit plans

The value of board and lodging

Tool Allowances


Understand the following concepts and definitions to help make sure you avoid overpaying from an audit.


In most states, the amount attributable to overtime in excess of the regular time pay rate may be deducted. It must be clearly identified in your records. Excess pay for overtime must be clearly segregated in the payroll records.


Division of an individual employee’s payroll to more than one classification is not allowed, except for construction or erection operations and/or certain executive officer classifications. When payroll is divisible, daily time card must be kept allocating the work to different classifications. Failure to keep daily time cards may result in all payroll of an employee getting assigned to the highest rated classification.


Avoid becoming responsible for injuries to employees of subcontractor, by obtaining certificates of insurance naming you additional insured. Check your contracts with your subcontractors to make sure you are held harmless and properly protected by indemnification clauses. Auditors look to see if you have adhered to the terms in your policy as respects to your subcontractors. Sometimes audits go bad when the certificates are not in place, or the auditor decides payments to subcontractors are really wages to employees.


Set up your automated records to provide audiors what they need, and you will find your audits go smoothly, and save you lots of time in the future.


Accounts payable journal and cash dispersements

A/R journal

All vehicle leases, including but not limited to, owner-operator leases

Annual income tax statements

Documents supporting entries in the journals and financial statements

Driver and vehicle logs

Expense journal

Income Statements

Monthly Individual earnings reports

Payroll records including the payroll journal

Quarterly 941’s

Registrations for owned vehicles

SUI’s (State Unemployment Reports – DE 6’s in California)

General and subsidiary sales ledgers

All underlying journals


Source by Don Bury