Preparing for Your Premium Audit

Having the proper records saves you time and can save you money by ensuring that you receive an accurate audit.

Our experienced premium audit staff performs our audits whenever possible. Due to geographical constraints, capacity and size of account, we may also contract with outside premium audit service providers.

Information Needed

Having the proper records can save you time and money by ensuring that you receive an accurate audit. Depending on the type of policy, your auditor will let you know the records that will be needed in advance. Typically, the audit will include a review of your business operations, as well as financial and business records. Please be assured that we consider confidentiality of the utmost importance, and we keep all information in the strictest of confidence.

Examples of operational review activities:

Tools, materials and processes
Employee job duties
How and where products/services are delivered
Tour of facility
Type of business entity

Examples of financial and business records requested:

Payroll records of original entry
General ledger
Job-cost records
Sales and receipts journals
Subcontractors cost
Hire/termination dates for employees

Quarterly tax returns (Federal 941 and state unemployment returns)
Cash disbursements
Financial statements
State sales-tax returns
Certificates of insurance for subcontractors used
Cost of hired equipment/vehicles

What is Considered Payroll

Many insurance policies, such as Workers’ Compensation, are based on payroll. Payroll includes:

Gross wages or salaries
Bonuses
Holiday pay
Sick pay
Other money substitutes received by employees as part of their pay
Commissions
Overtime pay
Vacation pay
Piecework

In addition, some states have specific rules concerning what should be included in determining your Workers’ Compensation coverage premium. For example, although overtime pay is included, the amount paid in excess of straight time can be deducted if your records can verify this excess. This is not applicable in Pennsylvania and Delaware for Workers’ Compensation coverage.

The Definition of Gross Sales

Gross sales is the gross amount charged by the business for all goods or products sold or distributed, operations performed during the policy period, rentals, and dues or fees. This would include discounts or allowances. If your policy premium is based on gross sales, certain items can be deducted from gross sales, such as sales or excise taxes submitted to a government division; credits for repossessed, damaged or returned merchandise; finance charges; freight charges; and royalty income from patents or copyrights, which are not product sales.

The Definition of Total Costs

Policies based on total costs are primarily for General Liability when subcontractors are used. This includes the cost of all labor, materials and equipment furnished, used or delivered for use in the execution of the work. This would also include all fees, bonuses or commissions made, paid or due.

Interchange of Labor in Workers’ Compensation Policies

Interchange of labor means some employees may perform duties related to more than one basic assigned classification. For Workers’ Compensation policies, some states allow the split between two or more basic classifications as long as the employer maintains proper payroll records that reflect the actual time spent performing work in each classification (percentages are not accepted). Several states do not allow a split unless the insured is involved in construction or erection work. Otherwise, the entire payroll is assigned to the highest-rated classification.

The Importance of Certificates of Insurance for Subcontractors

In order to protect your business, you should always secure a certificate of insurance for both Workers’ Compensation and General Liability coverage at the time you hire each subcontractor or independent contractor. Having proof of proper and adequate insurance for your subcontractors will lessen the chargeable premium at time of audit.

The Importance of Notifying Your Agent about Wrap-up Projects

An owner-controlled insurance program (OCIP), or wrap-up project, should be specifically endorsed on your policy with Penn National Insurance prior to the start of the job. This way, the owner of the project’s insurance will cover those exposures directly, and your policy with us will exclude those exposures and charges. Without such an endorsement, it is unclear as to who is responsible for those exposures and could result in audit charges on both policies. It is to your advantage to make sure your agent is aware of any wrap-up projects and that your policies are endorsed appropriately.