By Jeff Forbes
Unlike many other lines of commercial insurance, workers’ compensation premiums paid at the beginning of policy periods are estimated amounts.
These premiums are based on your projected payroll per classification and operations for the upcoming policy period. The purpose of a premium audit is for an insurer to evaluate your actual payroll and work performed at the conclusion of a policy period to determine whether the initial premium amount was accurate.
It is important to properly prepare for an audit.
Premium Audits Explained
First, there is a standards manual that all insurance companies adhere to related to premium and audit calculations. It is not arbitrary. Auditors will follow that manual. Your premium is based primarily on three key elements:
- Employee classification rates: Employees are assigned class codes and rates based on the work they perform, and the perceived level of risk associated with that work. The riskier the employee’s job role is, the higher the rate. It is important to remember that classes are assigned and can change based on the audit.
- Payroll: Rates are assigned to each classification, and the rates apply per $100 of payroll. In most states this includes bonus, overtime, etc. Each state also has a maximum payroll for executive officers.
- Experience modification factor: You are familiar with the experience modification factor because most of you are required to provide the EMR as a qualifying factor for projects. The mod is a factor generated by your loss experience compared to expected losses – your loss rate against your payroll. Above 1.00 is a surcharge. Below 1.00 is a credit.
Avoiding Surprises!
There are certain things that can cause surprises at an audit. If the auditor perceives that the employee is doing work outside the anticipated scope in the classification originally assigned, the auditor will reassign them. This typically means assigning them to a higher rated code.
For example, you have someone assigned to the very low rated programmers code, but they go a job site occasionally and might work on an installation. They could get reassigned.
If programmers or engineers are not physically divided from an assembly or manufacturing area, the auditor might move everyone into the higher rated code anticipating higher hazards.
Remember if someone’s duties are 90% in one classification and 10% in another higher rated class all of their payroll could get moved. You must be honest but avoid “hypothetical” conversations with auditors.
Another often tricky item is the assignment of a classification for owners or managers. Are they clerical, sales or the main classification?
Be Prepared
Be prepared for the auditor’s requests. Have the records and documentation ready for them in advance. Ask the auditor for exactly what they need to see to complete their work.
This will include but may not be limited to:
- Payment and payroll records: This includes your accounting ledger, payroll journal, overtime payroll records, material and labor payments, state unemployment tax reports and individual earnings records.
- Job descriptions: This includes an outline of job duties for each position and their classification.
- Insurance certificates: If you use subcontractors make sure you have their WC certificate. If not, the auditor is entitled to pick up a portion of their payroll and charge you premium at your audit.
Honesty and accuracy are important as insurance fraud is a serious issue. But no one wants surprises. If the auditor begins asking numerous questions, check with your insurance representative for guidance.
Make sure you request a copy of their worksheets at the end of the audit, but keep in mind this worksheet will contain confidential information such as the payroll for each employee, manager and owner.
After the Audit
Once the auditor has their information, it is supplied to the underwriting group to process the audit. If you disagree with the outcome, you can dispute the findings.
Your insurance broker should be able to assist you through the process, but audits contain confidential payroll information, and your insurance agent does not receive a copy of the worksheet.
Jeff Forbes is a blog contributor specializing in risk, legislation, regulations and casualty topics.
Photo credit: Photo by Vitaly Gariev on Unsplash
This article was originally published in the September 2021 CSIA Newsletter and was updated August 6, 2025.
