Some surprises are nice — but an unexpected invoice with an additional premium due to an insurance audit definitely isn’t one of them. Here’s how to avoid that unpleasant surprise and stay ahead of your audit.

Step One: Setting Up the Policy
Insurance policy premiums are based on one or more of the following: Annual Revenue, Annual Payroll (broken down by job type, e.g., Installer vs. Sales vs. Clerical), and Subcontractor Cost (including material costs paid to the subcontractor). Your initial premium is based on estimated dollar amounts for each of these categories over the next 12 months. The closer those estimates are to reality, the smoother your audit will be.

If your estimate is too high, you may receive a return premium — but that’s money you could’ve used during the year. If your estimate is too low, you may owe an unexpected lump sum at audit.

Subcontractor Costs vs. Payroll: Subcontractor costs are typically charged at a much lower rate than payroll. However, for expenses to remain classified as subcontractor costs, all of the following must be true: the subcontractor carries their own insurance, you collect and keep a valid Certificate of Insurance (COI) on file, and the COI includes all required coverages: General Liability, Auto Liability, and Workers’ Compensation. If any of these are missing, those expenses will be reclassified as payroll during audit — which can significantly increase your premium.

Owner Inclusion/Exclusion: As an owner or officer, you may choose to include or exclude yourself from Workers' Comp coverage (but not General Liability). If you exclude yourself, a signed owner exclusion form is required. If you include yourself, factor in your payroll when estimating annual payroll totals. If you don’t take a salary, you’ll still be subject to your state’s minimum owner payroll requirements, which vary by state.

Job Classifications: Employees can only be classified under one job code — and it must be the most hazardous duty they perform, even if it’s occasional. Example: General Manager (GM). If they help with installs even once a week, they must be classified 100% as an installer. If they never do installs but handle both sales and admin, classify as 100% sales. If they only handle admin/clerical duties, then clerical applies. Some insurance companies may default to the riskiest classification due to the possibility of job-site work, so clarify duties as much as possible.

Step Two: Stay Organized Throughout the Year
Require all subcontractors to have insurance. Collect and file COIs from every subcontractor. If you’re unsure what to require, ask your consultant for a sample Subcontractor Agreement (or check this learning portal). If you knowingly use uninsured subcontractors, you will be responsible for their premiums.

If your revenue, payroll, or subcontractor costs change significantly during the year, notify Rikor right away. The sooner we update your policy, the more time you'll have to spread out any extra premium over remaining monthly payments. Rikor will also reach out around 6 months into your policy to help adjust estimates.

Step Three: Be Prepared with Documentation
When audit time comes, gather the following:

Payroll Reports for the full policy period, including: Employee Name, Job Description (to support payroll classification), and Total payroll for each employee.

If owners are included: Ownership structure (percentage breakdown) and job duties of each owner.

Subcontractor COI Folder: Keep all proof of insurance organized and ready to submit.

12-Month Financials: Profit & Loss statement showing total revenue, payroll, and subcontractor costs.

Step Four: Be Prompt
Once you’re notified by the carrier, submit the requested documents as soon as possible. If you delay: the carrier can assign a non-compliant status, they may add a non-compliance fee (often 20% of your annual premium), and if the audit isn’t paid, your current policy may be canceled and the premium sent to collections — which cannot be disputed later.

Step Five: Review the Audit for Accuracy
When you receive your audit results: compare them to the documents you submitted, check for misclassified employees, incorrect payrolls, or missing COIs, and contact your insurance company or consultant right away if anything looks wrong. Audits often contain errors — reviewing your audit is your best protection against overpaying. When in doubt, ask your consultant to walk through it with you.

Audits can feel complicated, but following these five steps will help you stay organized, avoid last-minute surprises, and protect your bottom line. Rikor is here to support you every step of the way.