What are Assumed Audits for Business Insurance?

June 6, 2024 | Written by Jerry Nicklow

Understanding Assumed Audits for Workers’ Compensation and General Liability Insurance Policies

When it comes to workers’ compensation and general liability insurance policies, understanding audits is crucial. These audits, conducted at the end of a policy term, help determine the actual rate for your insurance policy based on the previous year’s payroll or gross sales. But what happens if your business fails to complete the requested audit? This is where assumed audits comes into play.

What is an Assumed Audit?

At the end of each policy term, an insurance company can ask for an insurance audit to verify the payroll and/or gross sales.  An assumed audit occurs when an insurance company performs an estimated review of your business’s payroll or gross sales due to the absence of an actual audit. Essentially, if you fail to complete the actual audit as requested, the insurance company can impose an assumed audit. This estimate can result in a significant increase in your premium, sometimes from 25% to 200%!   It can even result in the cancellation of your insurance policy.

The Impact of Assumed Audits on Your Premium

Assumed audits can be costly. Since the insurance company doesn’t have accurate data, they may overestimate your payroll and risk levels. This conservative approach protects the insurer but can hurt your bottom line. Imagine expecting a certain premium and being hit with a huge increase because of an assumed audit. Not only will you owe 25% to 200% more on the policy that just expired, but your renewing term will increase from 25% to 200% too!  This financial surprise is something every business wants to avoid.

Long-Term Consequences of Missed Audits

Missing audits over multiple years can have even more severe repercussions. If a business repeatedly fails to complete its audits, the insurance company may opt to cancel the policy. This cancellation will be contingent upon completing the audit for the missing years. Without accurate audit data, not only will you face inflated premiums, but you also risk losing your coverage altogether.

How to Avoid Assumed Audits

1. Timely Responses: Always respond to audit requests promptly. Set reminders for audit deadlines to ensure you never miss them.  Most companies offer an online portal to complete the audit.  We do an audit every year for our workers compensation policy and it takes about 30 minutes to complete.
2. Accurate Record-Keeping: Maintain accurate records of your payroll and operations. This documentation will make the actual audit process smoother and faster.  If you are a contractor who may perform different duties throughout the year, keep accurate records of the payroll figures for each duty.  They may ask for your quarterly 941 payroll reports, tax returns and/or income statements to justify your figures.
3. Professional Help: Consider hiring a professional to manage your workers’ compensation and general liability insurance audits. They can ensure that all necessary information is submitted correctly and on time.  If you need a referral for a bookkeeper, accountant or payroll service provider, please let us know.
4. Open Communication: Keep in regular contact with your insurance provider or their auditor in charge. If you’re facing difficulties completing an audit, communicate this early on to explore possible solutions.  They may allow more time to complete the audit before raising your premiums.  Ignoring the situation will never help your situation.

The Benefits of Completing Actual Audits

Completing your insurance audits has its advantages. It ensures you pay a fair premium based on accurate data. Additionally, it helps build a strong relationship with your insurer, potentially leading to better terms and rates in the future. Regular audits can also provide insights into your business operations, helping you identify areas for improvement and growth.

Conclusion

Assumed audits are a critical aspect of both workers’ compensation and general liability insurance policies that businesses must not overlook. The potential for up to a 200% premium increase and the risk of policy cancellation highlight the importance of completing actual audits on time. By staying proactive and maintaining accurate records, you can avoid the pitfalls of assumed audits and ensure your business remains protected.