General liability class codes are used by insurers to classify small businesses according to the risks they face. They help insurers determine the correct price to charge customers for general liability insurance.
What are general liability class codes?
General liability class codes are numbers that represent small businesses that do similar work and share common hazards. Using research, insurers can predict the losses companies in each code will experience over time. This helps them set an appropriate general liability insurance premium for those businesses.
You can often find general liability class codes at the independent insurance agent association (Big “I”) for your state. However, it might be more convenient to ask your licensed Insureon agent to look it up for you.
Why are general liability class codes important?
General liability class codes are important because they provide an objective and accurate method for insurers to set their premiums. This lets them match the common hazards class members share with an appropriate price for insurance.
Setting the right premium is essential because charging too much or too little can have a negative impact on insurers and their customers:
If insurers charge too little, it might spark an underwriting loss (in which claims paid exceed premium income). This does not bode well for an insurer’s long-term viability.
If insurers charge too much, it may force small business owners to switch to a more affordable company.
From the insurers’ perspective, high premiums will make them less competitive in the market. This can have a negative impact on their revenue and long-term business success.
How do insurers develop and use general liability class codes?
The first step in creating a class code is for insurers to develop a numbering system that groups similar companies together. Insurers often adapt numbering schemes other organizations have developed, including:
- NAICS (North American Industry Classification System)
- ISO (Insurance Services Office)
- SIC (Standard Industrial Classifications)
Then insurers collect and analyze national, regional, and state insurance claims data for companies in each class. Insurers can then calculate rates for each class code based on the frequency of general liability claims in each class, their severity, and their cost.
Finally, to determine a company’s premium, insurance companies apply the class rate to other customer factors, such as gross sales, payroll, or amount of space owned or leased. The resulting number is the price a small business will pay for general liability insurance.
Do insurers use class codes for purposes other than rate setting?
Insurers use general liability class codes to exclude coverage for certain types of claims.
For example, let’s say you bought general liability insurance for your real estate agency. Your class code is “47050 Real Estate Agents.” However, you decide to take on a renovation construction project for one of your clients – work you used to do before you became a real estate agent.
If you or one of your workers injures a passer-by at your job site, your general liability insurer might not cover your claim because the loss resulted from you working outside the class code assigned to your policy.
How are general liability class codes different from workers’ compensation class codes?
General liability class codes and workers’ compensation class codes are similar in that they both classify businesses by risk to help insurers charge an accurate premium.
However, they can only be used for their specific insurance product. For example, an insurer can’t use the NCCI workers’ compensation codes to generate premiums for general liability insurance or general liability codes to price workers’ compensation insurance.
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