The carrier requests information
You may receive an email, letter, phone call, online questionnaire, or appointment request from the insurance company or an independent audit vendor.
Contractor insurance learning center
Contractor Insurance Audits: What to Expect
Many contractor general liability and workers compensation policies begin with estimated payroll, sales, or subcontractor costs. The audit compares those estimates with the actual figures.
Maintaining organized payroll, financial, subcontractor, and certificate records throughout the year can make the audit easier and help prevent avoidable premium surprises.
Why audits happen
Your original premium was based on an estimate.
When a contractor policy begins, the final payroll, sales, and subcontractor costs for the coming year are not yet known. The insurance company therefore calculates an initial premium using estimates.
After the policy period ends, the company may conduct an audit to determine the actual exposure. If the actual figures are higher than estimated, additional premium may be due. If they are lower, the insured may receive a return premium, subject to policy terms and any applicable minimum premium.
An audit is not automatically an accusation that something is wrong. It is a normal feature of many contractor general liability and workers compensation policies.
Important:
The audit changes the final premium for the expired policy period. It
may also cause the insurance company to update the exposure estimates
used for the current renewal policy.
The basic audit process
What happens after an auditable policy expires?
The format varies by insurance company, but most audits follow a similar sequence.
You submit records
The auditor reviews payroll, sales, subcontractor payments, certificates, tax records, and descriptions of work performed during the policy term.
The auditor classifies exposure
Employees, owners, sales, and subcontractors are assigned according to the policy classifications and applicable audit rules.
The carrier calculates premium
The audited exposure is compared with the original estimate and the final policy premium is calculated.
You receive the audit statement
The statement may show additional premium, a return premium, or no significant adjustment.
The renewal may be updated
The current policy estimates may be revised to reflect the most recent actual payroll, sales, or subcontractor costs.
Types of premium audits
The insurance company may complete the audit in several ways.
The method depends on the size and complexity of the contractor, coverage, insurance company, and records involved.
Online or Self-Audit
The contractor completes a questionnaire and uploads requested payroll, financial, and subcontractor documentation.
Telephone Audit
An auditor reviews the operation and figures during a scheduled call and may request supporting documents electronically.
Physical Audit
An auditor may meet with the contractor or bookkeeper and review detailed records for a larger or more complicated account.
Estimated Audit
If required information is not provided, the company may estimate the exposure, often using an increased figure that may be unfavorable.
Workers compensation audits
Payroll must be separated by actual employee duties.
Workers compensation is commonly rated using payroll assigned to classification codes. Each classification represents a type of work and carries a rate reflecting its expected injury exposure.
Clerical employees, outside salespeople, electricians, plumbers, carpenters, roofers, tree workers, and other field employees may have different classifications. The employee’s actual work matters more than the title used by the business.
Payroll division between classifications is not always permitted. Without detailed and acceptable records, an employee may be assigned to the highest-rated classification applicable to any work performed. Rules vary and should be reviewed for the specific policy.
- Payroll journal by employee
- Quarterly federal and state payroll reports
- Job duties for every employee group
- Overtime records when applicable
- Owner and officer payroll information
- Work performed outside Virginia
- Temporary and leased employee records
General liability policies may be rated using gross sales, employee payroll, subcontractor costs, units, or another exposure basis. Many contractor policies use a combination of payroll and subcontractor costs or total receipts.
The auditor may review the company’s profit and loss statement, general ledger, tax returns, invoices, payroll records, and subcontractor payments to determine the actual exposure.
The business should separate material costs, employee labor, subcontracted labor, insured subcontractors, and other expenses in its accounting records when possible. The applicable treatment depends on the policy and audit rules.
Learn about contractor general liability insuranceGeneral liability audits
Sales and subcontractor payments commonly drive the adjustment.
- Gross annual receipts
- Employee payroll
- Subcontractor costs
- Cost of work subcontracted
- Types of projects completed
- Residential and commercial work percentages
- Descriptions of all operations
Subcontractors
Certificates of insurance can have a major effect on the audit.
Hiring an insured subcontractor does not automatically remove every exposure, but failing to document coverage can produce additional premium.
General Liability Certificates
The certificate should show that the subcontractor maintained general liability coverage during the period when work was performed for your company.
Workers Compensation Certificates
When applicable, the certificate should show workers compensation coverage during the subcontracted work. Sole proprietors and excluded owners may require additional documentation.
Matching Policy Dates
A certificate issued today does not prove coverage existed last year. The coverage dates must overlap the dates the subcontractor performed work.
Accurate Business Names
The name on the certificate should correspond with the subcontractor listed in your accounting records, invoices, contracts, and payment reports.
Appropriate Limits and Operations
The subcontractor’s policy should reflect the work performed and any minimum limits required by your policy, contract, or carrier.
Collect Before Work Begins
Obtaining certificates at audit time can be difficult, especially when a subcontractor has closed, moved, or stopped responding.
Common reasons for additional premium
Why a contractor audit may be higher than expected
Business Growth
Actual sales, payroll, or subcontractor costs exceeded the estimates used when the policy began.
Uninsured Subcontractors
Acceptable certificates were not available for subcontractors paid during the audited policy term.
Different Operations
The audit identified work that was not included in the original classification or application.
Recordkeeping Problems
Incomplete records prevented the auditor from separating lower-rated and higher-rated work or documented subcontractors.
Owners and officers
Owner treatment depends on the policy and business structure.
Sole proprietors, partners, limited liability company members, and corporate officers may be treated differently under workers compensation rules. Depending on the circumstances, they may be included, excluded, or subject to a specified payroll amount.
General liability policies may also include owner labor, regardless of whether the owner receives a traditional W-2 paycheck. The treatment depends on the rating basis and policy rules.
Do not assume that an owner is excluded simply because the business did not include the owner in regular payroll. Confirm the policy elections and audit treatment with the agency.
Entity changes matter:
Tell your agency if the business changes from a sole proprietorship to
an LLC or corporation, adds owners, or changes officer responsibilities.
Review the audit as soon as it arrives. Compare the audited payroll, sales, subcontractor costs, classifications, and policy period with your records.
An unexpected bill is not automatically an error. It may reflect real business growth or uninsured subcontractors. However, classifications, duplicate figures, incorrect policy dates, missing certificates, or other mistakes can occur.
If you believe something is wrong, gather the supporting documentation and contact the agency promptly. Audit-dispute deadlines may apply, and the carrier may continue collection activity while reviewing the dispute.
Reviewing the results
What to check on your completed audit
- Correct business and policy period
- Correct payroll and sales totals
- Correct employee classifications
- Correct subcontractor totals
- Credit for documented insured subcontractors
- Correct owner or officer treatment
- No duplicate exposure
- Explanation of any new classifications
Prepare throughout the year
The best time to prepare for an audit is before the policy expires.
A consistent recordkeeping process is easier than reconstructing an entire year after the audit request arrives.
Track Payroll by Job Duty
Use accounting and payroll records that identify each employee and the actual work performed.
Separate Subcontractor Payments
Maintain vendor summaries showing who was paid, how much, and what work each subcontractor completed.
Collect Certificates Immediately
Require acceptable certificates before a subcontractor starts and obtain renewal certificates when coverage expires.
Keep Written Agreements
Store signed subcontractor agreements with certificates, invoices, and project records.
Monitor Business Growth
Compare actual payroll, sales, and subcontractor costs with policy estimates during the year.
Tell the Agency About Changes
New operations, new states, larger projects, additional crews, and increased subcontracting should be discussed before audit time.
What happens if the audit is ignored?
An incomplete audit can create larger problems.
Audits are policy requirements. Not responding usually does not make the obligation disappear.
The insurance company may issue an estimated audit using increased exposure figures. The resulting premium can be higher than an audit based on accurate records.
An unpaid audit balance may be sent to collections and can affect the contractor’s ability to obtain coverage from the same or another insurance company.
The current policy may be cancelled or nonrenewed when an audit is incomplete or a balance remains unpaid. Exact consequences vary by carrier, policy, and applicable rules.
If you cannot provide a requested document or believe the request is incorrect, contact the auditor or agency instead of ignoring it.
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Frequently asked questions
Contractor insurance audits
Audit procedures vary by insurance company and policy. Contact the agency when you have questions about a specific audit.
Many policies begin with estimated payroll, sales, or subcontractor costs. The audit determines the actual exposure and calculates the final premium for the expired policy term.
Common requests include payroll reports, quarterly tax filings, profit and loss statements, general ledgers, subcontractor payment summaries, certificates of insurance, and descriptions of work performed.
Yes. Payments to subcontractors without acceptable proof of insurance may be included as auditable exposure, depending on the policy, work performed, coverage, and applicable audit rules.
You can request a review when you believe the audit contains an error. Submit a clear explanation and supporting payroll, accounting, classification, or certificate documentation promptly. Deadlines and procedures may apply.
It may result in return premium when actual exposure is lower than estimated. However, minimum premiums, deposit premiums, fees, policy terms, and other factors may limit or eliminate the refund.
The company may issue an estimated audit, charge additional premium, send a balance to collections, cancel or nonrenew current coverage, or affect future insurance eligibility. Consequences vary by policy and carrier.
It can. The insurance company may update the renewal’s estimated payroll, sales, or subcontractor costs to reflect the most recent audited figures.
Plan for the audit before renewal
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