As a commercial risk manager, you’d be surprised at how many calls I got that started something like, “I’m a contractor, how much would general liability cost me?” This is not unusual and it’s easy to understand that most new business owners are not aware of how insurance companies establish rates for the many types of businesses out there. Here, we’ll discuss insurance class codes and how they must be used properly to get accurate rates.
With commercial insurance, one size does not fit all. An easy example would be comparing a roofing contractor risk with a lawn maintenance risk. Although both types of businesses have certain everyday business risks, the roofing contractor is going to pay more in terms of liability insurance and especially workers’ compensation insurance.
Why do I need to know about Class Codes?
It’s a good idea to know what specific codes are assigned to your business because insurance agents and insurance companies can make mistakes because they make assumptions. If you are a painting contractor that also owns a paint store, you shouldn’t pay the same rates for both businesses because the code for the store is completely different than the code for your contracting business. Although this article is about general liability insurance, the same argument certainly applies to workers’ compensation when there are likely multiple class codes for one business.
Where do Class Codes Come From?
Many insurance companies will base their general liability class codes from data that is accumulated by the Insurance Services Office (ISO) but not all of them. Some carriers will use the date from the North American Industry Classification System (NAICS) while others us the Standard Industrial Classifications (SIC) and there are some carriers will use their own information based on losses they have paid.
Even though this can be confusing for business owners, it’s still important that you understand HOW your insurance rates were established. Have you ever wondered why insurance rates for one company are much higher than another for the same customer?
What about Workers’ Compensation Class Codes?
Unfortunately, the class codes for workers’ compensation insurance are even more confusing. Not every state uses the same code list because not every state handles workers’ compensation the same way. With workers’ comp insurance, there are three different methods that a state can elect to use:
- NCCI – Classes, and rates are based on the data provided by the National Council on Compensation Insurance (NCCI)
- Monopolistic – States that use this system do not allow private insurers to sell workers’ comp. Businesses must buy the coverage from a state-operated insurance fund.
- Independent – Can use NCCI or other rating manuals.
Can’t I trust my Agent?
Certainly, you can trust your agent and carrier to rate your policy correctly but mistakes can happen. Have you ever made a deposit in your bank’s drive-thru only to find out when you got home they used the wrong account number? Mistakes can happen and when they do, you generally won’t know until you compare what you’re paying to the policy of a friend with a business like yours.
You can always trust an experienced and reputable insurance broker like Fairbanks Insurance Brokers to make certain your policy is properly rated with the proper class codes and mistakes aren’t made.
Contractors should make certain that all everyday risks are addressed and mitigated using a package of affordable insurance products from highly-rated commercial insurance companies.
Here is What We Recommend
General Liability: Contractors General Liability will be the foundation of protection for your business. The coverage will respond if you or your employees are found liable for bodily injury, property damage, or have a products/completed operations complaint. The coverage also covers defense costs for your business to respond to any lawsuits brought by a third party.
Workers’ Comp: Many states will require contractors to provide workers’ compensation coverage for their workers before they can begin a project. Accidents will happen at the job site that can result in an employee becoming injured and missing work. Your workers’ compensation coverage will provide financial assistance for medical expenses and lost wages.
Surety Bonds: It’s very likely that your state will require you to be licensed before you can begin operations. Most states and customers will require contractors to offer a license or surety bond before you are allowed to bid on a job or begin working.
Commercial Auto: Typically, most contractors will have light and heavy vehicles that require commercial auto insurance to make certain their vehicles can be repaired or replaced in the event of an accident, vandalism, or theft.
Tool Coverage: Also known as Inland Marine Insurance, this policy will provide for reimbursement for expenses to repair or replace tools and equipment. Your tools represent an important part of your livelihood, so we always encourage carpentry contractors to consider this valuable coverage.