📨 The Letter That Ruins Your Weekend
You paid your General Liability and Workers' Comp premiums faithfully every month for a year. The policy expired last month, and you renewed it. You think you are done.
Then, a letter arrives from the carrier. It's not a Thank You note. It's a bill.
"Final Audit Result: Additional Premium Due: $15,400."
Why do you owe money for a policy that is already over? Because business insurance isn't a fixed price product like Netflix. It is a variable cost based on your success. If you don't understand the "Audit Rules," your growth becomes your punishment.
Most business owners misunderstand how commercial insurance pricing works.
When you sign up at the beginning of the year, the price you pay is only a "Deposit Premium" (Estimate). It is based on what you think your Sales or Payroll will be.
At the end of the year, the carrier checks the actual numbers.
• If you made less money than expected? They owe you a refund.
• If you made more money? You owe them the difference.
Received a $15,000 Bill AFTER Your Policy Expired?
The "Uninsured Subcontractor" Rule
This is where 90% of huge audit bills come from. Read this carefully.
Let's say you are a General Contractor. You hired "Bob's Painting" to paint a house for $20,000. Bob is an independent contractor, not an employee. So you didn't pay Workers' Comp for him.
The Audit Trap: During the audit, the insurance company asks: "Did Bob have his own insurance?"
If you cannot produce Bob's Certificate of Insurance (COI), the auditor treats Bob as YOUR EMPLOYEE.
💸 The Math of Negligence
Because you lost Bob's COI, here is what happens to your bill
| Amount Paid to Bob | $20,000 |
| Painter Class Code Rate (Example) | 15% ($15 per $100) |
| Surprise Audit Charge | + $3,000 |
Now imagine you hired 10 subcontractors like Bob. That’s a $30,000 surprise bill simply because you didn't collect a piece of paper.
Be extremely careful in states with strict labor laws like California (AB5 / ABC Test). Even if you have a COI, if the subcontractor effectively functions as your employee (you set their hours, provide tools, etc.), the state—and your auditor—may still classify them as an employee and charge you premiums. A COI is the first line of defense, not a magic shield.
The "Class Code" Mix-Up
Insurance rates depend on what your employees do.
- Clerical (Office) Staff: Very cheap (approx. $0.30 per $100 payroll).
- Roofers/Carpenters: Very expensive (approx. $20.00 per $100 payroll).
The Mistake: You have a foreman who spends 80% of his time in the office estimating and only 20% on the roof. If you don't keep detailed timesheets separating his duties, the auditor will classify his ENTIRE salary as "Roofing" (the highest rated code).
This simple classification error can triple your insurance cost for that employee.
Paying on "Overtime" (The Remuneration Rule)
Did you pay your team overtime (Time and a half) this year?
In most states, for Workers' Comp audit purposes, you do not have to pay premiums on the "premium portion" of overtime pay. You only pay on the straight-time rate.
💰 The Savings Example
Employee John worked 50 hours. Rate is $20/hr.
Regular Pay: $800.
Overtime Pay: $300 ($30/hr x 10 hours).
Total Pay: $1,100.
The Trick: If your payroll records are messy, the auditor charges you based on $1,100.
If your records are clear, you can exclude the extra $10/hr overtime bump. You only pay insurance on $1,000 (50 hours x $20).
Lesson: Separate your payroll columns!
The "Gross Sales" Trap
For General Liability (GL), the premium is often based on Gross Sales.
If you estimated $1 Million in sales but actually did $2 Million, your premium will double.
How to Fix It
Check the definition of "Gross Sales" in your policy. Does it include Sales Tax? (Usually no). Does it include Inter-company transfers? (Should be no). Does it include Freight charges? Make sure you are deducting these "exempt" items from the total sales figure you give the auditor. Don't just hand over your tax return blindly.
Can I Dispute an Audit?
Yes! Auditors are humans (or algorithms), and they make mistakes constantly.
-
Step 1: Do Not Pay Immediately.
Once you pay, it is very hard to get money back. Send a written "Notice of Dispute" to the carrier. -
Step 2: Gather Missing COIs.
If the bill is high because of subcontractors, call those subs NOW. If you can get the COI (even late), the carrier will often revise the audit and remove the charge. -
Step 3: Check the "Caps".
For Officers (Owners), payroll is often "capped." In 2026, the maximum payroll charge for officers in NCCI states is approximately $176,800 per year (varies by state). Ensure they didn't charge you on your full $500k income!
🛡️ Chief Editor’s Verdict
An audit bill is not a verdict; it is an opening offer.
- The "COI Box": Start a folder (physical or digital) TODAY. Every time you hire a sub, put their COI in there. No COI? No check.
- Update Your Agent: If your sales are skyrocketing mid-year, tell your agent. It's better to increase your monthly payment slightly than to get hit with a $20,000 bill at Christmas.
- Review Class Codes: Look at your policy "Declarations Page." If your receptionist is listed as a construction worker, fix it now.
Insurance is a game of details. The winner is the one with the best paperwork.
This article provides general information regarding insurance premium audits and workers' compensation rules. Officer payroll caps, overtime rules, and independent contractor classifications (e.g., California AB5) vary significantly by state and carrier. Always consult with a licensed insurance broker or auditor to review your specific policy terms and audit findings.
0 Comments