Associate | Subrogation & Recovery, Construction, Product Liability
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kwidenhouse@butler.legal
Overview | Blog Posts | Kurt Widenhouse | Related | Print | Share
Most commercial liability and workers’ compensation policies are priced on estimated payroll or subcontractor costs. Because those estimates are often imprecise, an audit (contractually authorized at policy inception) verifies the insured’s actual exposure at the end of the term. When an audit reveals higher-than-estimated payroll or uninsured subcontractors, additional premiums are owed. If exposure was overestimated, a refund may be due.
When commercial insureds purchase coverage, they estimate the total payments to employees and subcontractors – data that is used to estimate the policy exposure and ultimately the premium calculation. After the policy term expires, the insurer audits payroll, tax, and expense records to determine the true exposure. Insurers review records such as payroll journals, tax records, sales ledgers, and subcontractor certificates. The audit reconciles those figures with policy estimates and classifies each worker by risk level. Correct classification is critical: a clerical employee carries a lower risk than a construction worker or landscaper. Misclassification is a frequent source of dispute, making insured cooperation during the audit key.
Subcontractor insurance status is another central issue. In workers’ compensation audits, properly insured subcontractors are typically excluded from exposure. In general liability audits, subcontractors are almost always included due to the potential for vicarious liability, although proof of independent coverage can affect classification and cost.
Once classifications and payroll totals are verified, and if the audit shows the insured underreported exposure, the insurer bills for the difference. The insurer recalculates the premium using state-approved rates.
When an insured refuses to pay the additional premium, the insurer’s recovery rights arise directly from the policy’s audit clause. The proper cause of action is a straightforward breach of contract claim.
During the audit, transparency helps prevent later disputes. Involving the insured in employee and subcontractor classifications limits accusations of error or unfairness. If litigation becomes necessary, discovery should narrowly focus on payroll records, tax filings, subcontractor agreements, and certificates of insurance. Requests for admission can lock in key facts such as the existence of the contract, the audit authorization, and the accuracy of payroll figures reported to the IRS.
Because audit provisions are typically unambiguous, summary judgment is often the most efficient resolution. A persuasive motion begins with a simple factual outline: the policy allowed an audit, the audit was completed, it revealed additional exposure, and the insured failed to pay. Supporting evidence should include the policy language and, most importantly, an affidavit from the auditor explaining how the audit was conducted, what data was reviewed, and how the premium adjustment was calculated. This combination of documentation and auditor testimony should educate the judge and ideally allow them to rule in favor of the insurer.
Sometimes, an insured cannot genuinely pay a large adjustment in a lump sum. Structured payment plans or modest reductions for prompt payment can increase recovery chances and preserve relationships. Insurers that balance firm enforcement with flexibility often achieve better financial and reputational outcomes.
Public image also matters. Pursuing small businesses too aggressively can create the perception of unfairness. Insurers that communicate clearly, offer practical solutions, and demonstrate fairness build trust and strengthen their market position.
Premium audits protect insurers and policyholders by ensuring each policy reflects the true level of risk. Effective audit enforcement, grounded in contractual clarity, cooperative communication and strategic litigation, allows insurers to recover what they are owed while maintaining transparency and goodwill. Balancing rigorous collection with fairness ultimately supports long-term recovery and reputation.
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