ISO Rating System
Many commercial insurers calculate general liability premiums using a classification and rating system developed by the Insurance Services Office (ISO). According to the ISO system, premiums are largely based on three elements:
Classifications
ISO’s classification system is based on the premise that businesses with similar operations have similar risks and generate similar types of claims. The system includes hundreds of classifications, each identified by a written description and a five-digit number called a class code. The class codes are divided into five industry groups:
Mercantile: Codes 10000 to 19999Contracting or Servicing: Codes 90000 to 99999Manufacturing or Processing: Codes 50000 to 59999Buildings or Premises: Codes 60000 to 69999Miscellaneous: Codes 40000 to 49999
Depending on the scope of its operations, a business may be assigned one or more classifications. The classifications reflect a company’s industry and type of business. A few examples may include:
Barber Shops: Class code 10113 (Mercantile industry group)Clothing Manufacturing: Class code 51896 (Manufacturing or Processing industry group)Concrete Construction: Class code 91560 (Contracting or Servicing industry group)
Businesses are normally classified by their insurance agent or insurer when they apply for general liability insurance. The insurer may subsequently modify the classifications if it determines the business has changed or was incorrectly classified.
Rates
The second element of the rating process is the rate. The rate charged for a particular class code can vary from state to state and from one insurer to another. Many insurers devise rates using loss cost data provided by ISO. Others have their own methods for developing rates. No matter how your insurer calculates your rates, they should be listed in the Liability Declarations. A general liability policy includes two types of coverage: premises and operations coverage and products and completed work coverage. For many classifications, these coverages are rated separately. That is, one rate applies to premises and operations coverage and another rate applies to products and completed work coverage.
Premises and Operations
Premises and operations coverage applies to claims against your business for bodily injury or property damage caused by accidents that arise out of your premises. An example is a claim filed by a customer for injuries sustained in a slip and fall incident at your business office. Premises and operations insurance also covers claims for injury or damage caused by an accident arising out operations your company performs at your premises (such as a manufacturing facility) or offsite (such as a job site). This coverage would apply if, say, an employee of your construction company is driving a forklift at a job site when he accidentally crashes into a truck owned by a subcontractor.
Products and Completed Work
Products and completed work coverage applies to third-party claims for accidental injury or damage caused by your faulty products or by defective work or operations you have completed. This coverage would apply to a claim filed by a customer who became ill after eating take-out food he purchased from your restaurant. It would also cover a property damage claim filed by a customer of your concrete business after a wall you completed two months ago collapsed and damaged his truck. Some types of businesses produce minimal or no products or completed work. Examples are apartment buildings, photographers, piano tuners, and parking lots. These businesses are charged for premises and operations coverage only. No charge is made for products and completed operations coverage
Exposure Base
The third element of general liability rating is the exposure base that’s applied to the rate. The exposure base is dictated by the classification. Depending on the class code assigned to your business, your exposure base may be the area of your building, the amount of gross sales you expect to generate during the policy year, your projected payroll, or some other factor. Many classifications are rated based on sales. For these classifications, the premium is typically calculated by multiplying the rate times gross sales divided by 1,000. For example, suppose you expect your grocery store to generate $2 million in sales over the next year. If the rate is $2.00, your premium will be $4,000 ($2,000,000 / 1,000 X 2). Note that the calculated premium must equal or exceed the insurer’s minimum premium, the minimum amount for which the insurer is willing to issue a policy. If the premium falls below that amount, the minimum premium will apply.
