​Physical Audit General Information

Review the frequently asked questions below to learn more about the physical audit process

General Questions

​What is the purpose of a premium audit?
The purpose of a premium audit is to determine actual exposures and classes of operation for the coverage we provided. A premium audit protects both of us. Our auditors undertake this review to learn whether you overpaid for coverage, in which case your final bill will be reduced. If you underpaid, your final bill may be adjusted upward. Finally if risks, coverages, and exposures match what we project, your final bill remains the same.

In addition, information filed as part of unit statistical data reporting determines your experience modification and establishes appropriate premium rates for each state.
​Why do you need to audit a policy if I've already paid the premium?
​Workers compensation and general liability policies are based on variable exposures, such as payroll and sales, which are generated during the policy period. Your policy premium is initially based on estimated exposure for the policy period. When the policy expires, per Section 5 G of the workers compensation policy and Section IV.5 of the general liability policy, Liberty Mutual Insurance conducts an audit to determine the actual exposures during the policy period in order to develop the final earned premium for the policy.

Conducting an audit helps verify that your business's exposures and classifications are accurate.

The information is filed as part of unit statistical data reporting, which determines your experience modification and establishes appropriate premium rates for each state.
​Why does the auditor call so early to set up the audit appointment?
The auditor is trying to best serve you by contacting you in advance of the policy expiration date to set up an audit appointment. The sooner the audit is completed, the sooner we can provide you with the accurate final earned premium figures.
​Why is it important to complete an audit promptly after expiration?
​Conducting your audit promptly after your policy expiration helps ensure that:
  • We provide accurate final earned premium figures.
  • Your workers compensation data is reported in a timely manner so that you receive the best possible rate for your experience and exposure.
  • Unit statistical data reporting is completed according to the statutory requirements.
​How do I find out more about the auditor assigned to my account?
​Auditors are assigned physical territories based on ZIP code. To find out more information about your auditor, please:
  • Email us with your question, name, and policy number(s).
  • Call our customer service staff at 1-888-224-9246, Monday through Friday, 8:00 a.m. to 7:00 p.m. Eastern Time.
​Can my agent or broker be present at the audit appointment?
​Yes, your agent or broker can be present during the audit process.
​Will Liberty Mutual Insurance send audit worksheets to my agent or broker?
​Yes, if we have the policyholder's prior written approval. The audit worksheets contain confidential payroll information that is proprietary to the policyholder and Auditing Department. Most of the audit worksheets list the individual officer wages.
​What happens if I don't complete the audit?
​If you fail to respond, respond after the deadline, or supply incomplete or inaccurate information, our auditors submit estimated data. Possible impacts can include:
  • Increased premiums
  • The possibility of inaccurate or outdated data being used in calculating your experience modification
  • Additional work for all parties to correct incomplete or inaccurate data
  • Carrier exposure to penalties and fines for noncompliance with state regulations
​​I have completed the mail audits in the past, why do I now have to do a physical audit?
Due to state requirements physical audits must be completed every few years.
​Why are you requesting records for a previously audited period?
​In some cases, we may verify an audit that was previously estimated or completed via mail form to determine the accuracy of the final exposures and premiums. Per Section 5 G of your workers compensation policy and Section IV.5 of your general liability policy, Liberty Mutual Insurance can go back three consecutive years to perform re-audits or verification audits.
​Why is a preliminary audit necessary?
​The preliminary audit takes place at the beginning of the policy period in order to help resolve any issues prior to the final audit and to streamline the overall process. As part of the preliminary audit, we confirm the accuracy of the classifications and exposures included on the policy, identify the records and reports required for the audit, review and answer any questions regarding the audit, outline state audit procedures, and highlight any variances in auditing procedures that the prior carrier may have had. When reviewing records, the auditor may offer suggestions to the policyholder to help make record keeping and the final audit process more efficient.
​Why is full audit documentation needed for a preliminary audit?
​Having full documentation available during the preliminary audit enables us to provide better service, as we can identify and resolve potential issues at the beginning of your policy period and prior to the final audit.

Workers Compensaion Questions

​What documents are needed for the audit?
​This is not an exhaustive list, but gives an idea to the documents an auditor may ask for.  They will adjust this list based on the type of company they are auditing.
  • Payroll report organized by State of Work, Job Title, and Employee Name.  The report should list Gross Wages by employee.  Other wage amount that are beneficial to be detailed on the report include: Overtime, Double Time, and Severance. Certain states also allow the deductions of Section 125, Vacation, and other payments.  Please ask your auditor for a list of possible deductions for the state your employees work in.
  • Quarterly Federal 941's and /or State Unemployment Reports
  • List of corporate officers including Name, Corporate Title, % of Ownership, and Job Duties
  • Report of all Subcontract/Contract/Owner-Operators and/or temporary labor paid.  This report should include Name, Amount Paid, and Work Performed.
  • Certificates of Insurance for Subcontract/Contract/Owner-Operators and/or temporary labor.
  • A Profit & Loss Statement or full General Ledger Detail
  • Bank Statements with Check Images
  • Federal Income Tax Return
​Why are bonus, vacation, sick, and holiday pay included as part of payroll audits?
Per the National Council on Compensation Insurance (NCCI) Basic Manual Rule B.1.c and several independent state bureaus, bonus, vacation, sick, and holiday pay are part of an employee's compensation. However, there are exceptions to this rule. South Dakota and Kansas exclude vacation, sick, and holiday pay, while Oregon and Tennessee exclude bonuses. We take these rules into account to determine the policy premium.
​Who is an executive officer?
The National Council on Compensation Insurance (NCCI) Basic Manual Rule 2-E-1 defines executive officers of a corporation or unincorporated association as the president, vice president, secretary, treasurer, or any other officer appointed in accordance with the charter, resolutions, meeting minutes, or bylaws of such entity.
What is the definition of "Clerical Office Employee"?
​​The National Council on Compensation Insurance (NCCI) Scopes Manual defines a clerical office employee as an employee whose responsibilities include creating or maintaining financial or other employer records, handling correspondence, computer composition, technical drafting, and telephone duties (including sales by phone). A clerical office is a work area that is physically separated and distinguishable from all other work areas and hazards of the employer by floors, walls, partitions, counters, or other physical barriers.
​What is the definition of "Outside Sales Employee"?
The National Council on Compensation Insurance (NCCI) Scopes Manual defines outside sales employees as those engaged in sales duties away from the employer's premises. This classification is not available for employees who deliver merchandise.
​How are miscellaneous employees (maintenance, shipping, and receiving clerks, etc.) classified?
The National Council on Compensation Insurance (NCCI) Basic Manual Rule 1-E states that miscellaneous employees must be assigned to the governing classification, or the classification, other than standard exception classifications, with the most payroll exposure. For workers compensation purposes, we classify the business operations, not the individual employee duties.
​May the payroll for employees with multiple duties be split between class codes?
​Some employees may perform duties directly related to more than one properly assigned classification. According to The National Council on Compensation Insurance (NCCI) Basic Manual Rule 2-G, the payroll for such employees may be divided among the properly assigned classifications* provided that:
  • The classifications can be properly assigned to the employer according to the rules of the classification system, and the employer maintains proper payroll records that show the actual payroll by classification for that individual employee (hourly breakdowns, time cards, etc.). Estimated or percentage allocation of payroll is not permitted. 
  • Records must reflect actual time spent working within each job classification and an average hourly wage comparable to the wage rates for such employees within the employer's industry. 
If payroll records do not show the actual payroll applicable to each classification, the entire payroll of the individual employee must be assigned to the highest-rated classification that represents any part of his or her work. In addition, payroll cannot be split between a clerical or sales class code and a basic classification. All payroll exposure will be included in the higher-rated class code due to the Interchange of Labor rule.  

*Construction classifications are handled differently from other industries. Contact your auditor for more information.
​Why does the auditor need to see my profit and loss statement and/or tax return?
​These documents are used for a variety of reasons.  Auditors can review this document to find detail on the following:
  • Total Income vs. Labor Paid
  • Full amount paid to Subcontractors, Temporary Labor, or Cash Labor
  • Inflated Cost of Goods Sold
​Why does the auditor need to see my general ledger, disbursements journal and/or checkbook?
​We use these records to verify any non-employee exposures. In most states, a contractor is responsible for the payment of workers compensation benefits to employees of its uninsured subcontractors. As a contractor, you must furnish satisfactory evidence that any subcontractors performing work for you during the policy period have workers compensation insurance.
 
* Subcontractor handling may vary from state to state based on state bureau requirements.

Subcontractor Questions

​Why do you require 1099s, general ledger, income statement, or cash disbursement records?
​We use these records to verify any non-employee exposures. In most states, a contractor is responsible for the payment of workers compensation benefits to employees of its uninsured subcontractors. As a contractor, you must furnish satisfactory evidence that any subcontractors performing work for you during the policy period have workers compensation insurance.
 
* Subcontractor handling may vary from state to state based on state bureau requirements.
​Why would questions about 1099 contractors be part of the audit? Aren't they independent?
​The auditor will ask a series of questions about the method and frequency of payment(s), the relative nature of the work, and the amount of direction and control to determine whether a subcontractor is independent. If the auditor does not deem the subcontractor to be independent, the subcontractor will be included in the audit as an uninsured subcontractor. Insurance audit guidelines are not the same as standard IRS guidelines.
 
 * Subcontractor handling may vary from state to state based on state bureau requirements.
​If the state does not require sole proprietors to carry workers compensation coverage, why are they covered under my Liberty Mutual Insurance policy?
​Some states do not require subcontractors with no employees, or sole proprietors, to have workers compensation coverage. However, the auditor needs to determine whether an employer-employee relationship exists between you, the insured, and the subcontractor. If an employer-employee relationship exists, Liberty Mutual Insurance may be liable for any claims filed by the sole proprietor. Each state has different requirements to determine independent status.
 
* Subcontractor handling may vary from state to state based on state bureau requirements.
​Why do you need a certificate of insurance (COI) for a subcontractor that received a payment amount less than 1099 minimum?
​Proof of coverage is required for all subcontractors regardless of the amount of payment. The $600 IRS limit does not apply to the calculation of workers compensation premium.
 
* Subcontractor handling may vary from state to state based on state bureau requirements.
​​If my contracting compay requires subcontractors to sign a legal documents stating that they are no employee, why is a certificate of insurance still required?
This legal document does not waive the right of the subcontractor to file a claim for workers compensation. Therefore, the exposures are included for workers compensation premium calculation purposes.
 
* Subcontractor handling may vary from state to state based on state bureau requirements.
​Does proof that a contractor has an occupational health policy negate the need for a certificate of insurance (COI)?
​An occupational health policy is not the equivalent of a COI, nor does it replace workers compensation coverage. In some states, it may assist in the validation of "independent status."
 
* Subcontractor handling may vary from state to state based on state bureau requirements.
​Why are subcontractors included under an insured's workers compensation policy when a general liability certificate of insurance (COI) has been provided?
​In this situation, the auditor has determined that an employer/employee relationship exists between you, the insured, and the subcontractor.
 
* Subcontractor handling may vary from state to state based on state bureau requirements.

General Liability Questions 

​Why do you request payroll information when the policy is based on sales?
Some general liability policies are based on sales, but the composite rate is based on payroll. In order to develop the composite rate, we need to obtain all the necessary information as if the policy were standard-rated. We provide this information to our Actuarial Department, which uses it to develop the composite rate. The payroll information is not used to calculate the audit.
​Why are sales discounts and intercompany sales not excluded from sales exposure?
Per the ISO Commercial Lines Manual:
  • Discounts, whether cash or trade, do not change the liability arising from the sale and should be included. A cash discount, the amount of which is typically a percentage, is given when a client pays its bill within a specific period of time. A trade discount is usually given when a client purchases a certain quantity of merchandise.
  • Intercompany sales are excluded from products liability coverage if it is permissible to include more than one company on a single policy and all such companies are insured by a single insurer, whether on one or more than one policy. A specific endorsement may be available to exclude the intercompany sales for products liability coverage only. Contact your underwriter for further information.
​What are foreign sales?
Foreign sales are defined as sales of goods that are manufactured and sold outside of the coverage territory (United States and territories, and Canada), as detailed in Section V of the general liability policy. Liability coverage extends to only those sales that are generated in the coverage territory. Foreign sales are not goods or services manufactured or rendered and sold in a foreign country from a United States-based operation. Items sold in a foreign country but manufactured or distributed within the coverage territory are included in the audit, and liability would extend to those products overseas.
​Why is there a charge for insured contractors?
Your general liability policy defines "Your Work" as work or operations performed by you or on your behalf.  As the insured subcontractor is performing work on your behalf, your policy would defend a claim that could be filed against you for work performed by a subcontractor you hire, even if the subcontractor carried their own insurance.  As your policy would defend the claim, there is a premium charge made for any subcontractors that are used, even if they carry their own coverage.

Commercial Auto Questions 

​Why are purchased and disposal dates requested for covered autos?
Some commercial automobile policies are composite-rated based on the number of vehicles. The premium base uses the actual number of days that each vehicle is on the policy and prorates every vehicle for the actual number of days insured.
​Why are additional records needed to verify my fleet list?
Depending on the policy rating, Liberty Mutual Insurance is liable for additional vehicles that you have or operate. As a result, auditing is required to verify and obtain information regarding all of your vehicles.
​Why are idle vehicles included?
An endorsement is available to allow for the exclusion of idle vehicles. The vehicles must be idle for a period of 30 days or greater in order to qualify for the exclusion. If idle vehicles are not specifically endorsed off of the policy, they are included for premium calculation purposes. Leased vehicles may not be eligible for the exclusion based on insurance requirements outlined in the lease agreement.
​Why is an average used on my policy?
In certain circumstances an underwriter will endorse an auto policy to calculate exposure by an average of beginning vs. ending count.  In order for an auditor to calculate the exposure in this manner the following must occur:
  • There needs to be 25 or more units in the fleet
  • The change from estimated audited exposure vs. audited exposure, must be less than 20%.
So if you have less than 25 units in your fleet or a large change from estimated exposure, the average calculation cannot be used to compute audited exposure.

​Premium Audit Questions

For questions please contact our customer service team:

1-888-224-9246
Email
Online Request Form
Fax: 1-800-800-3723 

If your policy number is in the 15-character, alphanumeric format (e.g. WCC-123-456789-015):

1-800-231-3484
E-mail
Online Request Form
Fax:
1-603-422-0144 (Mail Forms)
1-603-334-0291 (Disputes)