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How Far Back Can an Insurance Company Audit You?

How Far Back Can an Insurance Company Audit YouHow Far Back Can an Insurance Company Audit You
min read
August 21, 2023

There's often one nagging question on business owners' minds when it comes to insurance: Exactly how far back can an insurance company audit?

While the answer to this question will vary based on what kind of insurance you have, today we're focusing on workers' comp since businesses are usually audited pretty frequently. 

Typically, workers' comp insurance providers can audit up to three years after a policy expires. The exceptions are Ohio, where they can audit up to two years following policy expiration, and California, where it's one year. 

In this article, we're looking at the specifics of workers' comp insurance, how far back your provider can audit, the documentation you're typically required to produce, and best practices for ensuring you're prepared for your next audit.

But first, let's start with the basics.

What Is an Insurance Audit?

An insurance audit is a review conducted by an insurance carrier that examines your business records to ensure you've paid the right premiums during a specific period of insurance coverage. 

With workers' comp, your premiums are traditionally based on your estimated yearly payroll and the class codes your employees are assigned to, so an audit compares those estimates to your actual figures.

For example, it you hired more team members and didn't let your insurer know, you'd owe a big chunk of change come audit time. That's because you technically underpaid for your insurance coverage and would need to make up the difference.

Bonus tip: Take the stress out of your workers' comp audit by using Hourly. We connect your payroll directly with your workers' comp policy, so premiums are based on real-time data—and not a guess. And you can pay as you go.

How Far Back Can Insurance Companies Audit a Business?

Most state laws allow insurance companies to audit businesses up to three years after their workers' comp insurance policy expiration. This rule doesn't apply if you're based in California or Ohio. Your carrier can audit you for a year in California and two years in Ohio.

Let's say your workers' comp policy period ended in August 2022. Here's how far back an insurance company can go to audit you:

  • August 2021 - August 2022: Workers' comp insurance policy period
  • August 2022 - August 2023: You can be audited in any state
  • August 2023 - August 2024: You can be audited in any state except California
  • August 2024 - August 2025: You can be audited in any state except California and Ohio
  • August 2025 and onwards: You can no longer be audited 

Exceptions to How Long an Insurance Company Can Audit You

Of course, there are special circumstances when an insurance company can audit you outside the normal period. If the insurance provider suspects you've given inaccurate information for your workers' comp insurance policy after the three-year auditing time period, they can take you to court.

The audit section in your policy lays out everything you need to know about your obligation to allow the insurance company to inspect and audit your records. It also tells you about the records you need to make your audits run smoothly.

However, different providers and states have different policies. Make sure to check the insurance laws and regulations in the states your employees are working in. If you have employees in different states, you'll need to abide by the regulations of those states, as well as your own.

What Triggers a Workers' Comp Insurance Audit?

Workers' comp audits usually happen annually or when you cancel your insurance policy. However, they can also happen during your coverage period if your insurance provider feels the need to verify your total estimated payroll and employee classification codes

Depending on the auditor and type of business, you may receive the notice in person, by mail, or over the phone. Some insurance companies may ask for a physical audit, where the provider sends a representative to review your documentation in person.

The audit process can take up to a month to complete.

How Does an Insurance Audit Impact Workers' Compensation Coverage?

An insurance audit can impact workers' compensation coverage in different ways, like:

  • Adjust your premiums: You may be charged an additional premium, or your premium could go down, depending on how close the estimates are to your actual needs or risks you carry.
  • Require extra payment: Businesses may end up paying an extra bill if there was a miscalculation in the initial estimates. 
  • Get money back from your insurer: You may also receive a repayment if your premium was higher than the estimates. 
  • Incur fines: A workers' compensation audit can also mean fines and penalties if you can't produce financial documents or are found to be providing fraudulent information. 

If you've paid the premium on time and kept your documentation in order, you shouldn't have anything to worry about. Let's take a look at exactly what documentation an auditor is likely to need.

What Do I Need for a Workers' Comp Insurance Audit?

Auditors generally ask for the following documents and reports for a smooth insurance premium audit

  • Payroll records: Payroll journals, forms 941, W-2, 944, and 1099, checkbooks, overtime payroll records, and state unemployment tax reports
  • Employee records: Job duties of each employee, along with hours, days, and weeks they work annually
  • Payment records: Cash reimbursement/disbursement entries, casual labor payments, material purchases, and overpayment entries
  • Certificates of insurance (COI): Insurance certificates for all independent contractors and subcontractors involved in the business
  • Workers' comp class codes

What Happens if I Don't Comply with an Audit?

Not complying with the insurance audit could mean paying fines of up to three times the estimated payroll calculated for your annual premium. 

It also negatively affects your experience modification factor—the insurance premium adjustment that can give you a discount or upcharge on your insurance.

If you're thinking—What if I just don't purchase workers' comp insurance? I can't be audited for something I don't have!—think again. 

In every state but Texas—where it's not mandatory—you'll face significant fines and sanctions if you're discovered to not have workers' comp insurance.

As with everything workers' comp insurance, the sanctions vary from state to state. They also depend on some other key considerations:

  1. Why you're not in compliance: Accidental or inadvertent noncompliance incurs smaller fines and sanctions than intentional noncompliance, like withholding or misrepresenting information.
  2. How long you've been out of compliance: The longer you haven't been complying, the more you'll have to pay. Most states have a daily rate they'll charge you for each day of noncompliance. 
  3. How many employees you have: Generally speaking, the more employees you have, the higher the fines for noncompliance.

Insurance audit noncompliance can get your business into serious legal and financial trouble. Noncompliance during audits also typically results in policy termination or nonrenewal by the insurance carrier. 

The exact fine and penalties vary by state, so it's essential to check the rules and regulations that apply to you.

Best Practices for Dealing with a Workers' Comp Insurance Audit

A workers' comp insurance audit may seem daunting, but you can get through it with much less stress by following these tips:

Maintain Up-To-Date Payroll Data

By keeping accurate payroll data and comparing it with the estimate in your policy, you can track any discrepancies.

If you notice the estimate is off, connect with your insurance agent. That way, they can adjust your premiums throughout your policy period and help you avoid getting hit with a huge audit bill. 

Use Correct Employee Classification Codes

Workers' compensation uses different metrics to determine your premiums—one of which is job classification codes. 

These codes evaluate the risks of different jobs and are set by a variety of institutions. Here are just a few of them:

Insurance companies use these codes to help calculate the cost of premiums. The higher the risk, the higher the value assigned. For example, riskier jobs like truck driving or construction may require you to pay a higher premium because of the risk involved. 

In order to determine which rating bureau and classification codes apply to your business, check with the state insurance department or seek assistance from an insurance professional.

Evaluate 1099s 

Don't forget to check if your contractors and subcontractors have insurance. The insurance audit will verify you're only covering your employees and not contractors. 

So, make sure to ask for your contractors' insurance certificates and check that their dates match when they worked for you. Otherwise, you could find yourself paying for extra coverage come audit time.

Organize Financial Records

The key to a faster audit is having your financial documents easily accessible. If you don't keep track of your paperwork regularly, it'll be tough to gather everything you need during an audit. 

Complete Audit Filings on Time

Hitting the deadline makes the insurance audit process smoother. You'll know the audit results in a few weeks after you submit your documents—so you won't have to spend too much time waiting (and stressing). 

Frequently Asked Questions

What is Workers' Compensation Insurance? 

Workers' compensation insurance is a type of insurance that covers workers who suffer work-related injuries or illnesses.

All states mandate that businesses purchase workers' comp insurance—apart from Texas.

If a worker is injured or gets sick on the job, workers' comp insurance will cover:

  • Wages
  • Health care expenses
  • Vocational rehabilitation expenses 
  • Disability benefits
  • Death benefits

Specific coverage and benefits can vary by state or country, so businesses should get in touch with their insurance agent for more information. 

For example, in some states, workers' compensation laws don't cover any injuries you get while commuting to or from work. Other exclusions include accidents caused by drug abuse, intoxication, or intentional injuries. 

How Much Does Workers' Comp Cost?

The cost of a workers' comp insurance policy depends on the number of employees you have, the type of work they do, and your claims history. So, the policy cost will be higher if your work involves more risk—like construction or skyscraper window cleaning, for example. 

Other factors that influence workers' compensation insurance are:

  • Your total payroll
  • State regulations
  • Workers' comp class codes: Codes assigned to different professions based on the risks associated with them.
  • Experience modification rate: An adjustment based on your claims history.
  • Your workplace safety program: A comprehensive safety program can reduce your premium.

Is Workers' Comp the Same as General Liability Insurance?

No, workers' comp and general liability are not the same. Workers' comp covers employees who sustain injuries during the workday, and general liability covers third parties—like clients or vendors—that sustain injuries or damages caused by your products, services, or operations. 

Keep Your Records Up to Date for a Smooth Audit

Workers' comp insurance provides your employees with financial support if injured on the job and protects you from lawsuits relating to those injuries.

The goal of the workers' comp insurance audit is to make sure you're paying the correct premium. Insurers usually conduct audits before a policy ends or annually. Insurance providers can typically audit three years into the past, but this varies by state. 

A workers' comp insurance audit isn't something to be scared of, but it is something to be prepared for. Keeping your financial documents, payroll, and classification codes current can help you breeze through the process.

So while it's not exactly a party, it's entirely manageable with the right knowledge and documentation. All that's left to do now? Check that everything is up to date, and then move on to running and growing your business.

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