How to Read Your Insurance Audit — and Avoid a Surprise Bill

Every year, contractors and small business owners across Texas open an envelope from their insurance company and find a bill they weren't expecting. Sometimes it's a few hundred dollars. Sometimes it's several thousand. And almost always, the reaction is the same: "I didn't know this was coming."

The bill is an audit premium — additional premium owed because the actual exposure during the policy year was higher than what was estimated when the policy was written. Understanding how audits work, what triggers a large bill, and how to keep your records clean can save you real money.

Why GL and Workers' Comp Policies Are Auditable

General liability and workers' compensation policies are written on estimated figures — usually estimated payroll, estimated revenue, or estimated subcontractor costs. The insurance company uses those estimates to calculate your annual premium at the start of the policy.

At the end of the policy year, the carrier audits your actual figures. If your actual payroll or revenue was higher than estimated, you owe additional premium. If it was lower, you get a refund or credit.

This is standard practice across the industry. It's not a penalty — it's how the premium is reconciled to match the actual risk the carrier covered during the year.

What Gets Audited

For workers' compensation: The audit is based on actual payroll by classification code. Each type of work has its own rate — roofing is rated differently than clerical work, for example. The auditor will ask for payroll records, tax filings (941s, W-2s, 1099s), and sometimes time records.

For general liability: Depending on the policy, the audit basis may be payroll, gross sales, or total project cost. Contractor GL policies are commonly audited on payroll and subcontractor costs.

Subcontractors are a major audit trigger. If you paid uninsured subcontractors during the year, the carrier may add their labor costs to your payroll for audit purposes — because without their own insurance, their work is treated as your exposure. This is one of the most common sources of large unexpected audit bills.

How to Prepare for an Audit

The best time to prepare for an audit is during the policy year, not after you receive the audit notice.

Keep clean payroll records. Separate payroll by job classification. If you have employees doing both roofing and general labor, track their hours by task. Misclassified payroll is one of the most common audit errors — and it almost always goes against the policyholder.

Collect certificates from every subcontractor. Before a sub starts work, get their certificate of insurance showing workers' comp and GL coverage. Keep those certificates on file. When the auditor asks about subs, you can show that each one carried their own coverage — which removes them from your audit exposure.

Track gross revenue by category. If your GL policy is audited on gross sales, know what your actual revenue was and be able to document it. Mixing project revenue with material reimbursements or equipment rental income can inflate your audit basis unnecessarily.

Don't estimate high at renewal. Some agents advise clients to estimate high to avoid audit bills. This just means you're overpaying premium all year and waiting for a refund. A more accurate estimate — with a plan to track actuals — is better than padding the numbers.

What to Do When You Receive an Audit

When the audit worksheet arrives, don't just pay the bill. Review it.

Check that the payroll figures match your records. Verify that subcontractors with their own insurance are not included in your payroll. Confirm that the classification codes are correct — a clerical employee classified as a roofer will generate a much higher premium than they should.

If you disagree with the audit findings, you have the right to dispute them. Your agent should be involved in this process. A good independent agent will review the audit worksheet with you, identify errors, and work with the carrier to correct them before you pay.

How We Help Clients Manage Audits

We walk our clients through the audit process at the start of every policy year — not just when the bill arrives. That means explaining what records to keep, how to handle subcontractor certificates, and what to expect at year-end based on their projected growth.

When audit bills do come in, we review them before our clients pay. We've caught classification errors, misapplied subcontractor costs, and incorrect payroll figures that would have cost clients thousands of dollars if they'd just paid the bill without looking.

If you're a Texas contractor or small business owner and you've received an audit bill that doesn't look right — or you want to set up your records correctly before your next audit — give us a call.

Call or text: 817.277.6166

Or get a quote online — we'll review your current policy structure and make sure you're set up to handle the audit cleanly.