Why Insurance Audits for Businesses Matter
Insurance audits for businesses are a crucial part of maintaining accurate and fair premiums, especially for workers’ compensation and liability coverage. If your business operates in Pennsylvania, understanding the audit process and complying with audit requirements can prevent penalties, unexpected charges, and even non-renewal of coverage.
Let’s explore what these audits involve, what documentation is needed, and how to avoid the common pitfalls.
Understanding Workers’ Compensation Insurance Audits
Workers’ Compensation Is Required by Law in PA
If you have employees, Pennsylvania law mandates that you carry workers’ compensation insurance. This applies whether your workers are full-time W-2 employees, 1099 independent contractors, or subcontractors.
Without this coverage, your business risks significant liability. If someone gets injured and sues you, your other policies won’t provide protection. Workers’ compensation is the only policy that can shield your business in these cases.
Also, explore our Business Insurance Services to make sure you’re covered from every angle.
Why You Need Workers’ Compensation Insurance
- Required by PA law if you have any employees
- Protects your business from lawsuits due to employee injuries
- Covers both W-2 and certain 1099 workers
If a 1099 contractor is injured and lacks their own policy, your workers’ compensation insurance may be forced to respond. This is why insurance carriers charge at audit time when documentation is missing.
Even if you have no direct employees, it is wise to maintain a policy for legal and financial protection.
PA Department of Labor & Industry has additional information on Workers Compensation insurance in PA.
Insurance Information Institute: Understanding Workers’ Compensation is an additional resource.
How Workers’ Compensation Policies Are Audited
Your premium is based on estimated annual payroll. At the end of your policy term, your insurance carrier conducts an audit to verify that estimate.
What You’ll Need to Provide:
- Payroll reports
- Quarterly UC2 forms
- Employee list with job duties
- 1099 and subcontractor documentation
Subcontractors and 1099 Employees
If you work with 1099 contractors or subcontractors, their payroll is included in your audit unless they provide:
- A current Certificate of Insurance
- A signed subcontractor agreement
- Documentation listing you as an additional insured
Failing to obtain this documentation means you’ll be charged for their exposure.
General and Liquor Liability Audits
Audits also apply to:
- General liability: Based on sales or payroll
- Liquor liability: Based on alcohol sales
Not all general liability policies are auditable, so ask your agent for clarity.
Accurate sales and payroll reporting ensures you don’t overpay and helps maintain the right level of protection.
Consequences of Ignoring an Insurance Audit
Neglecting your insurance audit can lead to:
- Penalty fees from your carrier
- Estimated audits with inflated charges
- Policy non-renewal, limiting your future coverage options
New insurers may be reluctant to write your business if your previous policy was canceled due to a failed audit.
Tips to Navigate the Audit Process
- Adjust your payroll estimates mid-term to reduce surprises.
- Respond quickly when contacted by the insurance auditor.
- Stay organized with required documentation throughout the year.
Being proactive will reduce stress and keep your premiums fair and predictable.
Need help managing insurance audits for businesses? Request a customized quote from McGroarty & Bradburn Insurance.
FAQs About Insurance Audits for Businesses
Q: How often are insurance audits required? Most audits occur annually at the end of the policy period.
Q: What if I miss the audit deadline? You may face penalties, estimated premiums, or non-renewal.
Q: What documents do I need for the audit? Payroll reports, employee lists, tax forms, subcontractor agreements, and Certificates of Insurance.
Q: Can I avoid paying for subcontractors? Yes, if they have valid workers’ comp coverage and proper documentation.
Q: Will my policy be canceled if I fail the audit? It could be non-renewed, and future coverage may be harder to obtain.