Control General Liability Insurance Costs With Accurate Classifications and Exposure Bases

JULY 5, 2022

Business owners are frustrated when they realize they’ve been overcharged for their general liability coverage — especially when they learn that mistakes related to classification and reported exposures could have been avoided.

How Classification Can Affect Premium Costs

General liability insurance premiums are primarily determined by classification codes and exposure. Classification codes are tied to the business’s operations, and each classification carries its own rate. While some businesses may be rated on a single classification, many require multiple classifications to properly represent their operations.

When insurance carriers apply classifications based only on broad titles instead of more precise definitions, businesses will overpay for coverage if the assigned classification has a higher rate than other more appropriate classifications for their operations.

Compounding this problem, as companies evolve and grow, their operations and exposures can change, while their existing classifications tend to be rolled over year after year. For this reason, USI Insurance Services conducts careful classification reviews with our clients to validate that their general liability exposures are represented correctly, providing them greater control over their premiums.

Scenario 1: Misclassifications

After reviewing a metal erection contractor’s operations, we discovered the company was performing both structural and nonstructural work, yet all of the payroll was being assigned to the higher-rated structural work. By adding the nonstructural classification and reallocating the payroll between the two, the company was able to reduce its premium by 19%.

When Operations Evolve, Exposures Change

Even when businesses are classified correctly, we discover errors in the exposures reported. A company’s exposure base can be measured by area, gross sales, payroll, subcontractor costs, and other types of units. Payroll or sales can fluctuate, and brokers may not pay attention to the exclusions or limitations that apply to certain exposure bases, such as a cap on the payroll of executive officers, or the deduction of payroll beyond the normal hourly wage for overtime work.

Understanding which exclusions and limitations may apply to an exposure base is critical to ensure that your premiums are correct. In many cases, it is possible to obtain premium refunds retroactive up to three years when a business has paid unnecessary extra premium due to these mistakes.

Scenario 2: Audit of Exposure Base

A company had employees working overtime and was unaware of an exclusion for the extra pay during overtime hours. Since it paid time-and-a-half, its reported payroll exposure was higher than necessary. USI reviewed the company’s payroll data and found the company was overcharged because of this error. We shared our findings with the insurance carrier, and it agreed to adjust the premium, resulting in a 14% cost savings.

Scenario 3: Audit of Exposure Base

A distributor of commercial greenhouses was concerned about significant increases in its general liability premiums. We conducted a review and uncovered a serious error.

While the company had self-performed all installation work in the past, as the result of its recent growth, most installation work was subcontracted out. However, the company was not listed as an additional insured on the subcontractors’ policies, so the insurance carrier had assigned the entire installation exposure as work performed by company employees, which carried a high rate.

USI validated that the subcontractors were carrying their own general liability coverage, and coached our client to require additional insured status on the subcontractors’ policies in their contracts. We then negotiated with the underwriter to reassign that portion of the exposure to the appropriate classification for subcontracted work. On the next renewal, the company’s premium was reduced by 18%.

What If the Error Is in Your Favor?

In some cases, businesses may think they are benefiting from a misclassification if they have been assigned a lower-rated classification in error. However, most policies are auditable, which means that eventually, their insurance company will discover the error. When this occurs, the insurance company has the right to charge additional premium based on the correct classification and exposure base reported by the audit. This can create financial pressure, as additional audit premiums must be paid promptly.

Bottom line: Make sure that both classification and exposures are represented accurately, so the insurance company can determine a fair premium charge at the inception of the policy term, allowing your business to pay premium in installments throughout the year.