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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

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general liability

General Liability

Classification

Rules Clinic

Presented by Penny Martin

general liability classification rules clinic
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
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
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 entity5
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
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
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
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
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
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 officers11
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 officers12
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 officers13
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 officers14
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

payroll exposure owners partners and exec officers15
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
Payroll Exposure – Contractors Executive Supervisors

Contractors executive supervisors code

is misapplied more than any other

construction code.

payroll exposure contractors executive supervisors17
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 supervisors18
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 supervisors19
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 supervisors20
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 supervisors21
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 supervisors22
Payroll Exposure – Contractors Executive Supervisors

Communication is key

in determining if employees qualify for this classification

payroll exposure contractors executive supervisors23
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 supervisors24
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
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 classification26
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 classification27
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 classification28
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
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
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 personnel31
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 personnel32
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 personnel33
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
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 operators35
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 operators36
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 operators37
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
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 draftsman39
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
Cost Exposure – Insured Subcontractor

Unlike other contractor classification exposures

Insured Subcontractor Exposure

is not

based on payroll

cost exposure insured subcontractor41
Cost Exposure – Insured Subcontractor

Insured Subcontractor exposure

Is based upon

Total Cost

cost exposure insured subcontractor42
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 subcontractor43
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 subcontractor44
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 subcontractor45
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 subcontractor46
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 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)
sales exposure sales inclusions and exclusions
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
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 operations50
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)

sales exposure manufacturing with retail operations51
Sales Exposure - Manufacturing with Retail Operations
  • Do not separately classify component parts or interim processes of the manufacturer if incorporated into the insured’s final product. Especially if such processes or parts are normally performed by the that type of product manufacturer

Refer to ISO CLM Manual Rule 27.B.2

sales exposure manufacturing with retail operations52
Sales Exposure - Manufacturing with Retail Operations
  • If a named insured sells its own products through its own retail operations, classify the manufacturing or processing operation separately in accordance with this rule and separately classify and rate the retail operations in accordance with manual rules.

Refer to ISO CLM Manual Rule 27.A.3

sales exposure manufacturing with retail operations53
Sales Exposure - Manufacturing with Retail Operations

For Premium Computation Purpose

  • Manufacturing and processing classifications are rated on a “Gross Sales” basis
  • Gross Sales” are to be determined for each classification developed
sales exposure manufacturing with retail operations54
Sales Exposure - Manufacturing with Retail Operations

Sales Inclusions

  • Sales of goods or products from one company to another
  • Sales from one named insured to another
  • Wholesale value of goods transferred to the retail operation

Refer to ISO CGL Manual Rule 24

sales exposure manufacturing with retail operations55
Sales Exposure - Manufacturing with Retail Operations

Sales Exclusions & Exceptions

  • Do not include the sales of goods or products from one named insured to another in the premium computation for products/completed operations coverage when inter-company products suits are excluded from coverage by Exclusion Endorsement

CG 2141 - Inter-company Products Suits Endorsement - Exclusion

sales exposure manufacturing with retail operations56
Sales Exposure - Manufacturing with Retail Operations

Sales Exclusions & Exceptions

  • Do not include the value of any transfers of component parts or interim processes within the same named insured
sales exposure installation service or repair of named insured products manufacturing risk
Sales Exposure – Installation, service or repair of named insured products (Manufacturing Risk)

Servicing or repair of named insured’s product, is a special classification inclusion and should not be separately rated, unless exception is listed in footnote.

Refer to ISO CGL Manual Rule 27.1.D.2

slide58
Sales Exposure - Installation, service or repair of merchandise sold or distributed by insured (Mercantile Risk)

Contractor rules do not apply to Mercantile Risk

Unless footnote states otherwise

  • Avoid adding contractor codes for installation, service and repair to a mercantile risk
  • Regardless of who completes the work, employees or subcontractors

Refer to ISO CGL Manual Rule 29.C

slide59
Sales Exposure - Installation, service or repair of merchandise sold or distributed by insured (Mercantile Risk)

Basis of premium for mercantile risk is “Gross Sales”.

When a mercantile risk is involved with installing, servicing or repairing the goods they sold,

separate payroll classification should not be used unless directed to do so by footnote.

This is an exception to the multiple enterprise principle.

slide60
Sales Exposure - Installation, service or repair of merchandise sold or distributed by insured (Mercantile Risk)

Example:

A carpet store

that installs the rugs and carpets they sell, classified as Mercantile floor covering stores

slide61
Sales Exposure - Installation, service or repair of merchandise sold or distributed by insured (Mercantile Risk)

Separate classification for the installation

of carpets should not be added,

even though such a classification exists, whether the carpeting is installed by employees of the risk, adequately or inadequately insured subcontractors.

The only basis of premium for this risk is gross sales.

other issues risk with two exposure bases sales and payroll
Other Issues – Risk with two exposure bases, sales and payroll

Some Manufacturing Risk have both gross sales and payroll exposure bases.

Manufacturing rate for gross sales does not contemplate installation, service and repair operations.

Refer to ISO CGL Manual Rule 28.B.3.D

other issues risk with two exposure bases sales and payroll63
Other Issues – Risk with two exposure bases, sales and payroll

Payroll of employees engaged in the installation, service & repair of the insured’s manufactured products shall be separately rated. If an employee’s work involves more than one classification or with a different exposure bases, assign entire payroll to appropriate code to payroll base.

other issues risk with two exposure bases sales and payroll64
Other Issues – Risk with two exposure bases, sales and payroll

Example:

Sign Mfg Company that also performs installation, service and repair

other issues risk with two exposure bases sales and payroll65
Other Issues – Risk with two exposure bases, sales and payroll

Sales Inclusions – sales for making signs

Sales Exclusions – sales tax, freight and installation if records provide separation. If not, use gross sales.

other issues risk with two exposure bases sales and payroll66
Other Issues – Risk with two exposure bases, sales and payroll
  • Payroll Inclusions - installation, service and repair labor.