How Far Back Can an Insurance Company Audit You?

Insurance audits are a regular part of doing business for many companies. But how far back can an insurer legally audit your records? Here’s what you need to know about insurance audits, including how long records must be kept and maintained.

What is an Insurance Audit?

An insurance audit is a review of a policyholder’s records conducted by the insurance company. The goal is to ensure the correct premiums have been paid based on the level of risk and exposure.

Audits typically occur:

• At the end of the policy period
• When a policy is cancelled mid-term
• On an annual basis for workers’ compensation and other policies

During the audit, the insurer will compare the estimated exposure used to calculate your initial premiums to your actual exposure based on a review of your records. Exposure refers to the risk factors used to determine premiums, such as:

• Number of employees
• Employee payroll
• Sales revenue
• Vehicle counts

If your actual exposure is higher than the estimates your premiums were based on, you will owe additional premium. If your actual exposure is lower, you may receive a refund.

The types of records reviewed depend on the policy but often include:

• Payroll records
• Sales and income statements
• Vehicle counts
• Certificates of insurance from subcontractors
• Invoices and job cost reports
• Permit fees
• Inventory records

How Far Back Can an Insurance Company Legally Audit?

Most insurance policies allow audits to be conducted up to 3 years from the end of the policy period. However, the exact lookback period can vary by state and policy type.

Workers’ Compensation Insurance

Workers’ comp audits are common, with annual audits being standard for most policies. In most states, workers’ comp insurers can audit up to 3 years back.

Exceptions include:

• California – 1 year
• Ohio – 2 years

So if your workers’ comp policy ended on 8/1/2022 in California, the insurer could audit the policy period of 8/1/2021 to 8/1/2022 until 8/1/2023.

General Liability Insurance

General liability policies also typically allow audits up to 3 years back. However, some states limit the lookback period for GL audits to shorter periods:

• Florida – 2 years
• Missouri – 2 years

For example, if your Missouri GL policy ended on 7/1/2022, the insurer could audit as far back as 7/1/2020.

Commercial Auto Insurance

Commercial auto insurance audits also follow the standard 3 year lookback period in most cases. However, some policies may limit the lookback period to shorter durations.

Business Owners Policies

Business owners policies (BOPs) combine general liability, commercial property, and business interruption coverages. BOPs often allow audits looking back 3 years as standard.

Directors & Officers Insurance

D&O liability insurance audits focus on confirming the accuracy of financial information used to calculate premiums. Lookback periods are often 3 years but can be limited based on state regulations.

The Insurance Audit Process

The audit process typically begins with a notification letter sent to the policyholder advising an audit will be conducted. The insurer then requests the applicable records based on the policy type and exposure factors used to determine premiums.

The auditor compares the provided records to the original underwriting data used to develop the premium quotes and payments. Differences and adjustments are noted and compiled into an audit report.

The end result is a calculation of whether additional premiums are owed or a refund is due based on the actual versus estimated exposures.

Audit Disputes & Appeals

It’s important to review audit findings closely before accepting them. Errors do happen. If you don’t agree with the audit conclusions, most insurance companies allow you to dispute the results.

The first step is to contact your agent or insurer directly to discuss any discrepancies. Have documentation ready to back up your position. Oftentimes, providing additional records or explanations can resolve disputes.

If you cannot reach an agreement with the insurer, most states provide a formal appeals process you can pursue for unresolved audit disputes. Timeframes to request an appeal are generally tight, so act promptly.

Tips for Preparing for an Audit

While insurance audits shouldn’t be feared, they do require preparation. Here are some tips:

• Maintain detailed records – Keep accurate books and records to support the exposure basis your premiums are calculated on. Organize records to make finding required documents efficient.

• Store records securely – Records should be stored in a secure, damage-proof manner for easy retrieval. Digitize records whenever possible.

• Understand policy provisions – Review your policy to understand the insurer’s audit rights, lookback periods, and record-keeping requirements.

• Assign an audit contact – Designate one person such as your controller to serve as the key contact and assemble records for auditors.

• Review preliminary audit reports closely – Don’t assume auditors are 100% correct. Review findings carefully and follow up on any concerns.

• Get help from your agent – Your insurance agent can help explain the audit process and policy provisions. Rely on their expertise.

Audit Penalties

Failing to comply with an insurance audit can lead to penalties:

• Premium recalculation – Your premiums will be recalculated based on exposures and records the auditor can verify. Unsupported exposures can be charged at increased rates.

• Cancellation – Non-cooperation with an audit is grounds for policy cancellation in most states.

• Increased scrutiny – Future audits and renewals will be more tightly scrutinized after audit non-compliance.

• Fraud suspicions – Lack of records may be viewed as misrepresentation by underwriters. This can lead to non-renewal of policies.

• Legal action – Insurers can pursue legal action and subpoenas to obtain audit records if records are withheld or concealed.

Avoiding Audit Problems

Complying with insurance audits doesn’t need to be painful if you follow best practices:

• Maintain detailed records with clear audit trails
• Assign an audit contact person
• Review policies to understand audit provisions
• Dispute unreasonable findings
• Ask your agent questions
• Organize records systematically

By preparing in advance and cooperating fully, insurance audits can be completed smoothly. Just remember auditors are simply confirming the rating and premium basis to keep insurance rates fair.

The Bottom Line

While insurance audits may seem tedious, they play an important role in ensuring premium accuracy and equitable pricing. By keeping detailed records and complying with reasonable requests, policyholders can avoid audit frustrations.

Know your state’s laws and policy provisions that dictate how far back audits can be conducted. With preparation and cooperation, your next insurance audit doesn’t have to be a source of anxiety.