The questions and answers below are some commonly asked questions. If you have a question not listed here, feel free to email us and we\'ll be happy to reply. We may even add it to the FAQ page!

What is a premium audit ?

Once a year insurance companies review commercial casualty insurance policy exposures to make sure they are accurate.

What records are needed ?

Costs for labor are almost always needed - Payroll records and costs of subcontractors are typical.

Payroll details are very important and can have a big effect on final premium - things like overtime, what jobs employees were doing, what states people worked in are very important.

There is also an extensive list of inclusions and exclusions published by the NCCI that define exactly how to measure workers compensation exposures.

1-One should always send copies of the state unemployment reports filed each quarter. These forms have all employee details needed and are a convenient way to send the information to the insurance company.

2-Payroll details for certain employees is essential to accurately calculate the final policy actual amounts.

What are the classifications used for and why are there more than one?

There is a classification of the policy that describes the business which is known as the governing classification and most employees are grouped into this classification.Certain employees such as office, salespeople, and drivers have special classifications called Standard Exceptions that must be separated from the governing classification employees and providing the payroll details for these employees allows the insurance company to separate employees into their proper classifications.

Subtracting the Standard exception employees payroll from the gross payroll leaves the payroll for all the Governing classification employees. This same process can be used for overtime and other adjustments.

Why are audits needed?

Companies are required by the state to prove to the government authorities that they have consistent procedures in place to measure how premiums are calculated and ensure all policyholders are treated fairly.

What can happen if someone reports inaccurate information to their Workers compensation company ?

It could potentially be a crime to report inaccurate information- see this interesting article from the Insurance Journal www.insurancejournal.com/news/east/2004/03/08/39897.html

Why are premium audits needed ?

The first and most important rule in insurance is be fair to all policyholders - to not discriminate.

Companies must make sure all policyholders have their exposures measured in the same way and accurately so no one pays more than is fair.

Why are my policy coverage dates so odd?

When you wrote your policy you needed coverage from the first day of operations so that is when your policy began.

Can I change my policy dates ?

You can change these dates if desired by working with your agent.Your actual information is entered into the insurance company computers and replaces estimated information used to issue your policy.

What do you do with the information from the audit ?

This information is used for the expired policies and often for the current active policies as well. Information from the audit is used to calculate accurate premiums based on real numbers rather than estimates. The information is also reported to rating bureaus and is combined with other companies\' data from your industry to calculate the proper rates and experience modification figures.

What is the audit process ?

The insurance company will contact the policyholder, stating dates of coverage and information that needs to be provided.

The policyholder must then assemble the records, do the analysis, provide to the insurance company, and be available to answer any questions that may arise.

Some companies may send an auditor to see you, which requires you and your records be available during the auditor\'s visit.

Can I do the audit myself ?

Yes you can. In fact many times the insurance company will ask you to prepare and send the information to them.

What items are included and excluded for payroll ?

Inclusions and exclusions are defined by the National Council on Compensation Insurance, which also administers the other rules and regulations for workers compensation insurance. Commonly excluded items include overtime, severance pay, and 3rd party payments including tips.

Inclusions per NCCI rules-Remuneration includes:

• a. Wages or salaries including retroactive wages or salaries;
• b. Total cash received by employees for commissions and draws against commissions;
• c. Bonuses including stock bonus plans. (Refer to Rule V-F.5 .)
• d. Extra pay for overtime work except as provided in Rule V-E
• e. Pay for holidays, vacations, or periods of sickness. (Refer to Rule IV-E.2.d. for allocation of payroll for employees subject to more than one classification code.)
• f. Payment by an employer of amounts otherwise required by law to be paid by employees to statutory insurance or pension plans, such as the Federal Social Security Act
• g. Payment to employees on any basis other than time worked, such as piecework, profit sharing, or incentive plans
• h. Payment or allowance for hand tools or power tools used by hand provided by employees either directly or through a third party and used in their work or operations for the insured
• i. The rental value of an apartment or a house provided for an employee based on comparable accommodations
• j. The value of lodging, other than an apartment or house, received by employees as part of their pay, to the extent shown in the insured\'s records
• k. The value of meals received by employees as part of their pay to the extent shown in the insured\'s records
• l. The value of store certificates, merchandise, credits or any other substitute for money received by employees as part of their pay (refer to Exclusions below for certain fringe benefits [substitutes for money] not considered to be remuneration)
• m. Payments for salary reduction, employee savings plans, retirement, or cafeteria plans (IRC 125) that are made through employee-authorized salary reduction from the employee\'s gross pay n.Davis-Bacon wages or wages from a similar prevailing wage law
• o.Annuity plans
• p. Expense reimbursements to employees to the extent that an employer\'s records do not substantiate that the expense was incurred as a valid business expense
• q. Note: When it can be verified that the employee was away from home overnight on the business of the employer, but the employer did not maintain verifiable receipts for incurred expenses, a reasonable expense allowance, limited to a maximum of $30 for each such day, will be permitted.
• r. Payment for filming of commercials excluding subsequent residuals that are earned by the commercial\'s participant(s) each time the commercial appears in print or is broadcast

Exclusions per NCCI rules- Remuneration excludes:

• a. Tips and other gratuities received by employees;
• b. Payments by an employer:(1)to group insurance or group pension plans for employees, other than payments covered by Rule V-B.2.f. and Rule V-B.2.m; and(2)into third-party pension trusts for the Davis-Bacon Act or a similar prevailing wage law, provided the pension trust is qualified under IRC Sections 401(a) and 501(a);
• c. The value of special rewards for individual invention or discovery;
• d. Dismissal or severance payments except for time worked or accrued vacation;
• e. Payments for active military duty;
• f. Employee discounts on goods purchased from the employee\'s employer;
• g. Expense reimbursements to employees to the extent that an employer\'s records substantiate that the expense was incurred as a valid business expense;Note: Reimbursed expenses and flat expense allowances, except for hand or power tools, paid to employees may be excluded from the audit, provided that all three of the following conditions are met:(1)The reimbursed expenses or expenses for which allowances were paid were incurred upon the business of the employer, and(2)the amount of each employee\'s expense payments or allowances is shown separately in the records of the employer, and(3)the amount of each expense reimbursement or allowance payment approximates the actual expenses incurred by the employee in the conduct of his or her work.
• h. Supper money for late work;
• i. Work uniform allowances;
• j. Sick pay paid to an employee by a third party such as an insured\'s group insurance carrier that is paying disability income benefits to a disabled employee;
• k. Employer-provided perquisites (perks) such as:(1)Use of an automobile;(2)An airplane flight;(3)An incentive vacation (e.g., contest winner);(4)A discount on property or services;(5)Club memberships;(6)Tickets to entertainment events.
• l. Employer contributions to salary reduction, employee savings plans, retirement, or cafeteria plans (IRC 125)--Contributions made by the employer, at the employer\'s expense, that are determined by the amount contributed by the employee.

Note - Payroll means remuneration.

1. Why is my policy written with such odd dates? Can I change the dates?

• a. Your policy dates can be changed by cancelling and rewriting the insurance policy. There are implications of this for workers compensation insurance due to the need to report consistent data for rating, so you will want to discuss with your agent to discover what will happen if you change to standard year end or quarter end dates.

2. Why should I provide the audit information?

• a. Lots of reasons, including maintaining a good relationship with your insurance company.
• b. If the company cannot get data from you for the audit they will need to develop some other source that might not be as accurate. The Insurance Company has an obligation to report exposure information from all policies for ratemaking purposes.
• c. Accurate information will help keep your discounts maximized as well as your experience modification, which can reduce your premium every year and is based on premiums and losses.
• d. Your insurance policy requires you provide the insurance company with the information they need to perform the final audit.

3. Do cash workers need to be included in the audit? Why?

• a. Cash workers are your employees and entitled to file for claims on your workers compensation policy and also create exposures for your general liability policy. You must report the total amounts you paid these people during the policy period.
• b. Some employers have a “probation period” for new employees when they pay them cash wages. All of these cash wages must be reported.

4. Why are certificates of Insurance needed for the audit?

• a. Certificates of Insurance (COI) are important evidence that the independent contractor you hired has their own insurance. You should receive a COI from the agent for each subcontractor, and that agent has an obligation to notify you if the policy is cancelled, as long as they sent you the original certificate.
• b. Fraud schemes sometimes involve photocopying a certificate and sharing it among several “independent contractors”. You should receive your own COI from the agent.

5. Why do Insured subcontractors need to be included for general liability?

• a. There are many exposures created by the existence of the subcontractor and you need to be sure they have taken care of their obligation to you to properly insure themselves. Here are a few examples of possible exposures from Insured subs:
• i. A subcontractor’s policy has very low limits of coverage and in a large loss situation cannot pay the claim that occurs
• ii. Subcontractor refuses to take responsibility and tells you to sue him if you want his policy to respond.
• iii. Subcontractor gets hurt on the job and sues you
• iv. Subcontractor causes a loss then disappears never to be heard from again, and the subs insurance company says the loss was not their insured’s fault and they won’t pay

6. Why are liquor sales used twice on general liability?

• a. There are 2 different exposures for a restaurant that sells liquor.
• Operations exposure from the glass, ice cubes, and liquid as well as the act of serving to the customer – all are included in the premises and operations code for restaurants.
• Liquor liability exposure from the effects of the alcohol on the customer, the inebriation effects.

7. What makes an executive supervisor different from other construction employees?

• a. Executive supervisor has more decision making authority than other employees and has direction and control over the entire construction operation.
• b. Executive supervisor does not directly supervise workers and NEVER does any hands on labor work. There must be at least one level of supervision between the executive supervisor and the workers-meaning a foreperson who actually supervises the workers, and is the only person the executive supervisor talks to
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• c. Executive supervisors spend most of their time in the office of talking to customers, architects, etc. They occasionally visit a job site also but this is not their main duty.
• d. Executive supervisor code can only be used for workers compensation construction codes – cannot be used for manufacturing or service businesses.

8. What is the difference between warehouse and wholesale store?

• a. This is a common error we see on policies, where a warehouse code 8232 is used for storing a product owned by the insured. Storage of the insured’s own products is intended to be classified code 8018 wholesale store.
• b. Code 8232 warehouse is only used when storing products owned by others such as a moving company might do or a public warehouse.

9. Why can\'t I break out travel and office time for my travelling workers?

• a. Classification codes are intended to classify a business and not separate jobs within the business. For example a plumbing business is rated code 5183 plumbing and all the jobs the plumbers perform are included in that classification. We do separate time the plumber spends
• b. This is the same reason we do not split clerical code 8810 with other codes – all jobs have some clerical components and these are normal and incidental to all people in the same job classification.

10. What is the difference between expenses and allowances are both excludable?

• a. Expenses are actual documented expenses incurred and reported using an expense report, and represent reimbursements to the employee. These can be deducted from the exposure base, so things like moving expense and gas expense can be deducted.
• b. Allowances are amounts paid to employees who would be likely to incur the expense but with no evidence they actually did incur the expense. These are normally flat payments for things like travel and moving and are not excluded from the audit because there is no evidence that an expense actually occurred.

11. Why do I need to provide payroll for a garage liability audit?

• a. There are different types of garage liability
• i. Payroll based garage liability relies on actual payroll usually with a maximum weekly payroll applied – the auditor needs actual payroll and weeks worked to properly limit the payroll.
• ii. Per Diem based policies use days worked as a basis of premium; however actual payroll records are the only way to verify the actual days worked, so payroll records should be a source document to properly verify the audit.

12. I have a new insurance company - do I still need to do the audit?

• a. Yes it is very important to still do the audit. You need to know that your premium was accurate – you certainly do not want to overpay.
• b. Your rates are calculated partly based on your company’s history of premiums and losses regardless of which insurance company you have during any given year, and you want that history to be accurate. If you provide your audit data every year then your data will be the most accurate possible.
• c. You are obligated by the contract of insurance to provide the information.
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13. Do I include terminated employees in the audit?

• a. Yes always include everyone who was employed during the policy period.

How to prepare your annual premium audit

Types of accounting information you will possibly need for your audit;

• 1. Payroll information for each employee
• 2. Cash payments for labor - to uninsured individuals
• 3. Total cost of labor and materials for each insured subcontractor used, and you will also need to provide certificates of insurance for subcontractors
• 4. Revenue information for the business.
• 5. You will also need to Describe your business

Payroll information will be needed for each employee, with separate totals for each different state the employee worked in. If an employee does more than one type of job and you keep records of amounts paid for each type of work you should report the employees payroll in that manner. If you are allowed to split the employee’s wages into different workers compensation classes the audit department will make sure the payrolls are allocated correctly. There are also adjustments allowed for overtime paid, tips documented for restaurant employees, and certain imputed income amounts

Officer and owner information for the business is very important. You should clearly indicate the name, title, earnings if a corporation, and type of work the officer does. Be sure and list the actual tasks the owner does rather than just a job title.

Unemployment reports you file each quarter are used to reconcile the gross payrolls reported. You will need the reports that were filed during the quarters your policy was in force so that you can record the total gross payrolls reported and compare these to the total earnings from the payroll system. The 2 numbers should match after quarterly gross amounts are adjusted for any time difference between your policy period and the calendar quarters used. Adjustments for section 125 amounts if not included in the unemployment gross reported are important since section 125 payments and 401K payments must be included for insurance audits, but are not always included for unemployment reporting depending on what state you are doing filings in.

Adjustments are amounts that will be deducted from payroll before calculating the final premium. Special types of earnings include overtime, severance paid, auto allowances paid, 3rd party sick pay, and IRS imputed income amounts such as personal use of company car. You should report these and the audit department will know how to treat the deductions. In addition in California Section 125 and 129 amounts deducted are excluded from payroll, in all other states these amounts are included.

Subcontractor costs and Cash workers are the total amounts paid to people who did work for your customers. These amounts are listed along with the type of work the subcontractor did and information from the certificate of insurance. The spreadsheet download is a great format for listing these subcontractors. Make sure you get certificates of insurance for all subcontractors, since they will be included as employees if they cannot provide proof of insurance. All subcontractors who are in business for themselves are potential employers and should have workers compensation policies in force. If they have no employees these subcontractors receive refunds of most of the premium paid for those workers compensation policies so there is no reason to be in business without a workers compensation policy! General liability insurance is also essential for a true business to operate, and a subcontractor who works for you without being properly insured will be included on your audit as an employee.

Sales information is used for general liability polices for retail and manufacturing businesses. It is often easier to include an income statement than to list sales separately especially if you have several class codes on your policy. If your gross sales include sales tax be sure to list the tax also, because taxes collected and remitted to the government are not included for insurance calculations. Returned merchandise is also not included, however discounts are included in the calculated premium.

Description of Operations that is accurate for your business is very helpful for underwriting and helps ensure your premiums are accurate. If you include the type of business, retail or wholesale, tools and equipment used and business processes the underwriter can get a better idea about your specific company.

That\'s it! That is all that is needed to complete the audit process every year, and if you ever need help please feel free to call anytime.

Premium Audit checklist

• 1. Assemble payroll information including quarterly unemployment compensation reports
• 2. Assemble amounts paid to subcontractors and certificates of insurance for workers compensation and general liability for all subs
• 3. Assemble information for cash workers
• 4. Have income statement info for sales based general liability policies
• 5. Select a format - spreadsheet, form, or call from telephone auditor
• 6. Provide the information
• 7. Always feel free to ask questions if you don\'t understand something

An important part of the audit process is to verify that the wages from the payroll system agree to the wages reported for the quarterly tax filings. This ensures the proper amounts are picked up for the audit.

You will need the quarterly reports that were filed during the quarters your policy was in force so that you can record the total gross payrolls reported and compare these to the total earnings from the payroll system.

• a. Total Gross Wages = Medicare Wages from Federal 941 + Pretax wages.
• b. Quarterly gross amounts need to be adjusted for any time difference between your policy period and the calendar quarters used, so when the auditor’s visit you, they always calculate the gross payrolls for the odd weeks that your policy dates differ from calendar dates, then add and subtract the odd amounts to verify the totals match. You can do this also if you understand the process.
• c. For example if your policy begins 11-1 and the quarter begins 10-1, you would calculate the total gross wages for the month of October of each year your policy was in force and adjust the quarterly gross wages using the October wages of each year.
• d. Wages 11/1/08 thru 10/31/09 = (Oct 09) + (Q3 09) + (Q2 09) + (Q1 09) + (Q4 08) – (Oct 08).

Adjustments for 401(K) and Section 125 plans must be included in the gross wages for insurance audits. These adjustments, but are not always included for unemployment reporting depending on what state you are doing filings in. Section 125 plan is a benefit plan that allows employees to select from a pool of choices, such as retirement contributions, vacation days, and health insurance and pay with pretax dollars

Medicare Wages + Pretax Deductions = Total Gross Wages.

• 1. Forgetting the quarterly UC reports - Unemployment quarterly forms must be available for the auditor or provided for the mail audit, they are a very important part of the process. Page 1 of the 941 form that includes line 5C satisfies this requirement.
• 2. Not having overtime summarized by employee, job, and state worked - because only the straight time portion of the overtime is included for the audit. Having the overtime detail available allows the auditor to calculate the proper credit.
• 3. Not listing officers who are named in corporate charter or articles of organization - what they do, where they work so that officers are properly classified. Each state has special rules for how to treat officers so this information is important.
• 4. Splitting clerical or sales earnings with other codes - Don\'t Do it! Code 8810 and 8742 are standard exceptions and in most states cannot be used with any other code for a single employee.
• 5. Not showing clerical, drivers, salespeople separately - can prevent the auditor from properly classifying these employees and cost policyholder money.
• 6. Using quarterly wages rather than exact policy period - could result in incorrect total wages, so if your system allows providing the exact wages that is always better-unless of course your policy period is quarters! It’s acceptable to use quarterly wages if you policy begins within 2 weeks of a quarter start date otherwise it is really best to use the exact policy period if possible.
• 7. Conducting the audit too late - more than 90 days after policy expiration is really late, the earlier you can provide the information the more accurate your data will be in the rating system.
• 8. Not defining the employee’s job duties - this is important, make sure you describe exactly what an employee does and where – for example an inventory clerk may always be in an office of may work in a warehouse – the difference affects the employee classification.
• 9. Not splitting payrolls for employees who qualify for multiple classifications - can cost extra premiums, the auditor can assist with each state rules for properly splitting employee payrolls.
• 10. Misclassifying employees - is a potential pitfall to avoid. The experience modification is based on accurate employee classifications, which can affect premiums that in turn affect expected value of losses and experience modification. An accurate experience modification is important to a long term stable premium development so make sure the employees are classified correctly.
• 11. Showing Net payrolls – audits always start with Gross wages, it is essential gross wages be available. If you provide net payrolls it can be much more difficult to get the correct final exposure – and an error can cost you money.

Employee Payroll information is needed for each employee, with separate totals for each different state the employee worked in and each different type work that has a unique workers compensation classification code.

• a. If an employee does more than one type of job and you keep records of amounts paid for each type of work you should report the employees payroll in that manner.
• b. If you are allowed to split the employee’s wages into different workers compensation classes the audit department will make sure the payrolls are allocated correctly.
• c. There are adjustments allowed for overtime paid, tips documented for restaurant employees, and certain imputed income amounts. Adjustments are amounts that will be deducted from payroll before calculating the final premium. These adjustments are different for every state and the auditor will be familiar with what adjustments apply in what states. Special types of earnings include:
• d. Overtime-the auditor will adjust the pay to deduct any overtime in excess of straight time pay
• e. Other common adjustments: Severance paid Auto reimbursements of actual expenses with supporting expense accounts provided Most fringe benefits the IRs consider income 3rd party sick pay IRS imputed income amounts such as personal use of company car included as income in gross wages
• f. In addition in California Section 125 and 129 amounts deducted are excluded from payroll, in all other states these amounts are included.
• Report these amounts and the audit department will know how to treat the deductions.

Officer and Owner payroll information is needed separately from the others employees of the business since Officers and Owners are treated differently in each of the 50 states and for different types of insurance policies.

• a. Clearly indicate the Name, Title, actual type of work the officer performs, and Total W-2 Gross Wages (if business is a corporation). If business is a sole proprietor or partnership include the draw but the auditor will only use that draw amount for workers compensation IF the officer is included in workers compensation coverage AND the work was done in one of the few states that use actual draws as earnings. Most states use a flat amount rather than a draw for sole proprietors and partners.
• b. Be sure and list the actual tasks the officer or owner does rather than just a job title.
• c. The only officer to list is someone who is listed in a corporate resolution as an officer, so do not list appointed officers who have a title but are not formally named in the corporate resolution.

Temporary Agencies provide workers to your company on an interim basis and employees of these temporary agencies must be insured by the agency that provided them.

• a. A Certificate of Insurance for Workers Compensation insurance coverage must be provided by the temp agency to you to prove they met their obligations to insure their workers. If the temporary agency cannot prove they insured their employees, claims will be paid by your policy and the amounts paid to those workers will be included on your audit.
• b. These temporary employees are included on your General Liability exposures because the temp agency has no insurable interest in your business and cannot provide general liability insurance for you – they can only provide workers compensation insurance for their own employees.

Adjustments are used to add and subtract from the gross payroll for employees. Remembering that each state has it\'s own rules for premium development, the auditor must be familiar with what states every employee works in and what rules apply for each state during the policy period.

Insurance audits always start with total earnings and then make adjustments as needed to come to the correct final exposure for each state, so adjustments are very important to get correct. The current rules for developing taxable total earnings for employees normally include virtually all payrolls and substitutes for payroll for employees so the adjustment rules for deductions in each state are the most common adjustments done.

Remember that normally total earnings = Medicare wages + Section 129 deductions + Section 125 deductions, so using wages that agree with this formula will normally produce the correct total earnings for the policy period.

The most common adjustments are listed below:

• Pretax deductions also known as section 125 /129 deductions are deducted from the premium base in California ONLY –other states section 125 is included in premium base
• Tips paid is a form of third party pay and is excludable from the premium base in many states. Remember tips and service charges are different – tips are paid directly to employees by customers, where service charges are paid to the employer.
• Severance paid is excludable from the premium base in many states
• Overtime dollars paid are excludable from the premium base in many states
• Value of Group term life over $50,000 are IRS imputed income and excludable from the premium base in many states
• Fringe benefits that are IRS imputed income such as personal use of auto is excludable from the premium base in many states
• 3rd party sick pay is excludable from the premium base in many states
• Reimbursed expenses shown in income which has actual records of the expense submitted is excludable from the premium base in many states
• Military pay is excludable from the premium base in many states
• Stock options are excludable from the premium base in many states
• Holiday / vacation / sick pay are excludable from the premium base in some states such as Kansas
• Residuals from commercials and motion pictures
• Expense reimbursements reported as income is excludable from the premium base in many states
• Stock bonuses are included in the premium base in many states