Understanding Premium Audits

An audit can be daunting for a business.  Gathering financial data and bookkeeping records can be a time-consuming and stressful experience. However, if you are prepared, there is no need to dread an insurance premium audit.

This article discusses what an insurance premium audit is, which policies are commonly subject to premium audits, the audit process, how to prepare for an audit and what happens after the audit is completed.

What is a Premium Audit?

The purpose of a premium audit is to calculate your ultimate insurance premium. Premium audits can be performed by your insurance carrier or an independent auditing firm.  They are common when your initial premiums are based on an estimate of your expected loss.  An audit will review your actual experience to determine whether the premiums that you paid accurately reflected the level of risk assumed by your carrier.  Most premium audits occur after an insurance policy expires or is canceled.  A premium audit may result in a change of premium or classification for your business.

Which Policies Have Premium Audits?

  • General Liability—A general liability insurance policy uses annual gross sales to determine a premium. In addition, projected revenue over the next 12 months may be factored in. Your revenue will be verified during the audit process, and your premium may be adjusted accordingly.
  • Workers’ Compensation—Workers’ compensation premiums are based on the number of employees you have, their classifications and payroll data. Workers’ compensation audits may take place quarterly or monthly.
  • Liquor Liability—Liquor liability insurance premiums are typically based on gross sales—including alcohol gross sales, nonalcoholic beverage and food sales—and some operations information.

Other forms of commercial insurance, such as commercial auto, cargo and freight, and certain property policies, may also be subject to premium audits.

How Premium Audits are Performed

As discussed above, initial premiums for certain types of policies may be based on estimated, expected loss.  An insurance company will review the financial information and other data submitted by your agent or broker and determine the initial premium for the policy.  However, the initial premium may not accurately reflect the risk undertaken by the insurance company.  In those cases, where the policy permits, a premium audit will take place.

A premium audit will typically occur within 90 days of the policy period expiration date.  You will be asked to either fill out a self-reported audit worksheet—typically online—or complete a physical field audit. Some states and insurance companies may require that some portion of the audit be performed in person.

During the audit, you will be asked to provide supporting documentation regarding the previous year’s revenue and gross sales. Based on that information, your premium may be adjusted, and the policy may be amended.

How to Prepare for a Premium Audit

The following are ways your business can prepare for a successful premium audit:

  • Make sure company records are organized and accurate. An auditor will likely need to review the following documents:
    • Payroll records
    • Overtime pay records
    • Sales records
    • Job duties and employee classification codes
    • Description of company services
    • Cash expenses
    • General company ledger
    • W-2 and 1099 forms for all employees and contractors
    • Company federal tax return forms
    • Certificates of insurance for all subcontractors
  • Be ready to discuss record-keeping procedures. Since recordkeeping procedures can impact your premium, knowing how your business operates is important.
  • Prepare any questions. There shouldn’t be any confusion regarding what is needed or expected from you for a premium audit.
  • Assign a designated contact with the insurer or auditor. Designating a primary contact to work with the insurer or auditor can ensure communication and the overall process goes smoothly and efficiently. The primary contact should be familiar with the audit process and your business.
  • Review the original policy. This may help you understand how the initial policy premium was calculated.
  • Analyze any publicly available information about the company. Industry databases, association listings, search engine results and your website should all be analyzed to catch and correct any inaccuracies.

After the Audit

Once the audit is complete, the auditor will send your business a report detailing their findings. From there, you will know if your business will have to pay additional premiums or will receive a premium refund. If you agree with the auditor’s findings, it’s best to take any necessary actions immediately.

On the other hand, if you disagree with the auditor’s report, you can file a dispute. Make sure you contact your insurance company directly for instructions on how to properly dispute a premium audit. Most insurers require you to send audit disputes in writing within a specified period, describe the problem in detail (with adequate reasoning) and suggest an alternative solution. The insurance company will then carefully review your dispute and determine whether an audit revision is necessary.


Overall, it’s crucial for your business to have a clear understanding of the premium audit process and how it can impact your insurance costs. More than anything, make sure your business is fully prepared for an audit—never ignore an insurer’s audit request. For more guidance, contact us today at 239-298-8210 or [email protected].

This article is not intended to be exhaustive, nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice. © 2023 Zywave, Inc. All rights reserved.