General Liability Classification Rules Clinic Presented by Penny Martin
Payroll Exposure Legal Entity, Owners and Officers Contractors Executive Supervisors Interior Carpentry Classification Insured Subcontractors Uninsured Subcontractors Leased and Temporary Personnel Contractors that pay Mobile Equipment Operators Draftsman Cost Exposure Insured subcontractors Sales Exposure Sales Inclusions and Exclusions Manufacturing with Retail Operations Installation, service or repair of named insured products (Manufacture Risk) Installation, service or repair of merchandise sold or distributed by insured (Mercantile Risk) Other Issues Risk with two exposure bases, sales and payroll General Liability – Classification Rules Clinic
Payroll Base Exposures • Legal Entity, Owners and Officers • Contractors Executive Supervisors • Interior Carpentry Classification • Uninsured Subcontractors • Leased and Temporary Personnel • Contractors that pay Mobile Equipment Operators • Draftsman
Payroll Exposure - Legal Entity • In order to determine who the owners are, you must first verify the legal entity. • Verifying the legal entity of the named insured is a very important starting point. • Underwriting should be notified if the named insured doesn’t match the records being audited.
Payroll Exposure - Legal Entity • Insured may have many “DBA” companies under one legal entity. • Most General Liability insurers do not have a “specific operations” exclusion endorsement. All operations performed by insured’s legal entity, should be included in audit remuneration. • Regardless of DBA or classification codes listed on the policy, everything must be reported on the audit worksheet!
Payroll Exposure – Owners (sole proprietors) • Owners in Texas are considered to be Husband and wife • If both are active in the business, daily activities must be provided to determine if owner payroll charge applies for each, and to determine the correct classification code.
Payroll Exposure - Partners (Partnership) • Partners are individuals that have created a legal partnership for business. • Each active partner’s daily activities must be provided to determine if owner payroll charge applies and to determine correct classification code for each.
Payroll Exposure - Executive Officers (Corporation) • Executive officers of a corporation are those persons holding officer positions created by the named insured’s charter, constitution or by-laws or any other similar governing document. • Daily activities must be provided, for each executive officer, to determine if owner payroll charge applies and to determine the correct classification code for each officer.
Payroll Exposure - Managing Members (Limited Liability Companies) • Limited Liability Companies may be organized in several ways. • First you must determine how the entity is organized to understand the ownership structure • Is the LLC structured like a sole proprietorship, partnership or corporation structure? • Then ask questions about the daily duties of the managers, members, or whatever the owners call themselves.
Payroll Exposure – Owners, Partners, and Exec Officers The difference between owner coverage for general liability and workers’ compensation is that under general liability, owners/officers cannot elect to be excluded from coverage
Payroll Exposure – Owners, Partners, and Exec Officers Exceptions Owner payroll charge may be waived for General Liability computation if the following criteria are met:
Payroll Exposure – Owners, Partners, and Exec Officers Owner Charge Exceptions • If owner/officer has exclusive clerical, outside sales or driving duties and another owner charge exist within remuneration • Owner/Officer does not oversee daily operations of the company and does not have administrative or managerial responsibility of construction or erection projects • Insured must have employees. If insured uses only contract labor and subs, owner charge can not be waived • If the insured has a layer of supervision between themselves and the employees. However, executive supervisor classification should be considered for owner if actively overseeing the day to day operations
Payroll Exposure – Owners, Partners and Exec Officers • Seasonal Operations – Some companies allow for owner payroll amount to be reduced 2% for each full calendar week in excess of 12 during which the Insured’s business performs no operations. • Owner charge may be pro-rated based upon their start and termination dates of their owner status.
Payroll Exposure - Owners, Partners and Exec Officers State mandated owner payroll amount must be charged for each active owner, partner, and executive officer when products/completed operations coverage is included. (Some exceptions may apply) Refer to ISO CGL Manual Rule 24.E.2
Reminder Insurer Company guidelines should be reviewed before owner charges are waived May want to include on worksheet and add Underwriting Review for consideration to exclude Payroll Exposure - Owners, Partners, and Exec Officers
Payroll Exposure – Contractors Executive Supervisors Contractors executive supervisors code is misapplied more than any other construction code.
Payroll Exposure – Contractors Executive Supervisors Two main reasons for misuse of the Contractors Executive Supervisors code are • Worker Comp rate is usually lower than other construction codes • Classification is based upon title instead of actual daily activities of the employee
Payroll Exposure - Contractors Executive Supervisors Contractors – Executive supervisors or executive superintendents is defined as having administrative or managerial responsibility for construction or erection projects. Supervisory control is done through job superintendents or foremen.
Payroll Exposure – Contractors Executive Supervisors • This classification doesn’t apply to individuals having direct responsibility of daily construction operations. • Contractors Executive Supervisors class is only available for executive supervisors or construction superintendents with administrative or managerial responsibility for construction and erection projects.
Payroll Exposure – Contractors Executive Supervisors • This classification does not apply to any person who is directly in charge of construction operations. • This classification is applicable only to executive supervisors who do not exercise direct supervision of construction or erection operations. Typical duties of an executive supervisor may include time spent in an office as well as job site (s) visitations, to check on construction progress. • Layers of management must exist. Auditor should specifically list job site foreman for each crew.
Payroll Exposure – Contractors Executive Supervisors • This classification is what ISO describes as a N.P.D. (No Payroll Division) classification. • For general liability, the payroll of individuals assigned to this classification may not be divided with another classification.
Payroll Exposure – Contractors Executive Supervisors Communication is key in determining if employees qualify for this classification
Payroll Exposure – Contractors Executive Supervisors • Be consistent with application of classification for both WC and CGL. • Determine and list specific daily activities for executive officers – do they visit clients, job sites, etc • Verify and explain layers of supervision. Usually there are three, but there must be at least one layer between Executive Supervisor and workers. • Never list job duties as “administrative”
Payroll Exposure – Contractors Executive Supervisors • Don’t apply this classification for estimators and outside sales employees. • Determine if duties were performed before construction began?
Payroll Exposure – Interior Carpentry Classification Interior Carpentry Operations include the installation of wood trim, cabinets and countertops, wooden flooring, sanding and scraping of wooden floors, doors, and paneling. Other operations may include wooden staircases being built at the job site, installation of locks and cabinet hardware, and weather stripping.
Payroll Exposure – Interior Carpentry Classification This classification does not apply to contractors responsible for any other carpentry operations at the same job or location.
Payroll Exposure – Interior Carpentry Classification Example: Residential general contractor uses subcontractors to perform all carpentry operations other than interior carpentry work. General contractors employees perform only interior carpentry work
Payroll Exposure – Interior Carpentry Classification General contractors employees, that perform only interior carpentry work, shall be classified as Carpentry – construction of residential property. NOT Interior Carpentry classification
Payroll Exposure – Uninsured Subcontractors Uninsured subcontractor wages shall be classified as payroll, in the appropriate classification that best describes the work performed.
Payroll Exposure – Leased and Temporary Personnel Leased labor and temporary company employees are not considered an “adequately insured subcontractor” for premium computation. Even if GL certificate of insurance is presented. Refer to ISO CGL Manual Rule 24.E.2
Payroll Exposure – Leased and Temporary Personnel • Insured has direction and control of leased and temporary personnel • Since employee leasing and temporary labor companies are not construction companies, their General Liability coverage does not match that of a contractor liability policy
Payroll Exposure – Leased and Temporary Personnel Leased Workers Exposure • The total payroll wages of leased workers furnished to the insured by the leased labor/personnel company • If the payroll can’t be determined from the insured’s records, use 100% of the total cost of the contract between insured and the leasing company
Payroll Exposure – Leased and Temporary Personnel Temporary Employee Exposure • Temporary workers wages plus temp fees should be included for payroll exposure • These records can be verified by insured’s General Ledger or check book register.
Payroll Exposure - Contractors that pay Mobile Equipment Operators When contracting risk rents mobile equipment from another entity A payroll charge must be made Because the mobile equipment operator will be under direction and control of the hiring contractor Refer to ISO CGL Manual Rule24E.2.1
Payroll Exposure - Contractors that pay Mobile Equipment Operators This includes • both insured and • uninsured subcontract mobile equipment operations such as a crane company Installing steel beams Insured must give direction on how and where beams will be placed
Payroll Exposure - Contractors that pay Mobile Equipment Operators Payroll should be included for • equipment operators and • their helpers when payroll is the premium base for insured’s operations
Payroll Exposure - Contractors that pay Mobile Equipment Operators • If payroll of mobile equipment operators is not available • 1/3 total cost should be used • Payroll exposure shall be classified under appropriate code that best describes the insured's operations at that location
Payroll Exposure -Draftsman General Liability classification rule differs from Workers Compensation, when it comes to drafting and clerical employees • Clerical & drivers wages are a general exclusion for CGL payroll exposure (unless code description or notes specifically state to include) Refer to ISO CGL Manual Rule 28.B.3.b
Payroll Exposure -Draftsman • Employees with exclusive draftsman duties, should not be excluded with clerical employee wages • Wages for draftsman, with no exposure to job site hazards, shall be classified under code 91805 Draftsmen
Cost Exposure – Insured Subcontractor Unlike other contractor classification exposures Insured Subcontractor Exposure is not based on payroll
Cost Exposure – Insured Subcontractor Insured Subcontractor exposure Is based upon Total Cost
Cost Exposure – Insured Subcontractor Total Cost Defined Total Cost of all work let or sublet in connection with all specific projects including:
Cost Exposure – Insured Subcontractor • All materials • labor, and equipment furnished, used or delivered for use in the execution of the work, and • Cost of materials and equipment purchased or rented by the insured, to be used in connection with the adequately insured subcontractor’s portion of the job. This amount must be obtained from insured’s records and added to cost amount for the adequately insured sub. • All fees, bonuses or commissions made, paid or due and • Payroll for mobile equipment operators and their helpers Refer to ISO CLM Manual Rule 24.32.1 ISO CLM ** this rule may vary by company**
Cost Exposure – Insured Subcontractor The classifications applicable to subcontractors hired by the insured only apply if the subcontractors are • adequately insured and • provide verification by Certificates of Insurance • Insurance binders and declaration pages should not be used for verification
Cost Exposure – Insured Subcontractor Classification for adequately insured subs should be determined by the named insured’s operations, not by the subcontractor’s work.
Cost Exposure – Insured Subcontractor Insured Subcontractor classification codes • Installation service or repair • Apartment or office building • Buildings • Buildings for industrial use • Not buildings • One or two family dwellings
Sales Base Exposures • Sales Inclusions and Exclusions • Manufacturing with Retail Operations • Installation, service or repair of named insured products (Manufacturing Risk) • Installation, service or repair of merchandise sold or distributed by insured (Mercantile Risk)
Inclusions Total sales of consigned goods and warehouse receipts Trade or cash discounts and bad debts Foreign Exchange discounts Freight allowance to customers Amount collected for repossessed items sold on installment basis Exclusions Sales or excise taxes, paid to insured and submitted to a governmental agency Freight Charges, if itemized separately on invoice Credits for repossessed products and returned merchandise Finance charges for installment based sales Sales Exposure – Sales Inclusions and Exclusions
Sales Exposure - Manufacturing with Retail Operations The rules regarding auditing of manufacturing and processing risks can be found in the ISO CGL Manual Rule 27
Sales Exposure - Manufacturing with Retail Operations Manufacturing and Processing Risk – Classification and Premium Computation Procedures. For Classification Assignment Purpose • This rule shall apply separately to each named insured included in the policy • Determine the classification(s) which best describes each named insured’s final product(s) or process(s)