What is an audit premium and how does it work?

Most tree service insurance policies — particularly workers' compensation and general liability — are rated on estimated exposures at the start of the policy term. Workers' comp premiums are based on estimated payroll by class code, while GL premiums are often based on estimated revenue or payroll. Because these are estimates, your carrier conducts a premium audit after the policy expires to determine what you actually owe based on real numbers.

The audit process typically begins 30 to 60 days after your policy expiration date. The carrier or a third-party auditor will request documentation including quarterly payroll records (941 forms), state unemployment tax reports, your profit and loss statement, certificates of insurance for all subcontractors used during the policy period, 1099 forms issued, and overtime records. The auditor compares your actual payroll, revenue, and subcontractor costs to the estimates on your dec page and recalculates the premium accordingly.

For tree service companies, audit surprises are common because of the seasonal and variable nature of the work. A company that estimated $400,000 in payroll but actually ran $600,000 due to a busy storm season will owe a significant additional premium. Conversely, a slow year means you overpaid and should receive a credit. Subcontractor costs are particularly important — if a subcontractor you hired did not carry their own workers' comp or GL, the auditor will add their payments to your payroll for premium calculation purposes. This is why verifying and maintaining current COIs for every subcontractor is critical.

One frequently misunderstood aspect is overtime. Under NCCI rules, only the straight-time portion of overtime wages is included in the auditable payroll. If an employee earns $30/hour and works 10 hours of overtime at $45/hour, only $30/hour (not $45) is used for those overtime hours. Many auditors miss this distinction, and tree service companies with significant overtime during storm season should verify that overtime is properly credited.

To minimize audit surprises, update your estimated payroll and revenue with your broker mid-term if your business grows or contracts significantly. Some carriers allow mid-term adjustments that smooth out the year-end audit. Keep organized records throughout the year — quarterly reconciliation takes minutes, but reconstructing a year of records during audit season takes days. Finally, always review the completed audit worksheet line by line. Errors in class code assignment, payroll allocation, and subcontractor inclusion are common and can result in thousands of dollars in overcharges that can be corrected through the audit dispute process.