If you’ve noticed that your CGL rates have recently increased, you should definitely check to see if there have been any recent changes to the class code that has been assigned to your business by your insurer.
Obviously, class codes are important because they ultimately determine how much you will be paying for your commercial general liability insurance. They provide insurers with a dose of objectivity and introduce a higher level of standardization and accuracy to the process of setting insurance premiums for businesses.
Insurers take this process very seriously because their financial success depends on properly classifying clients. On one hand, if they overcharge businesses for insurance they run the risk of losing clients and on the other hand, not charging enough could lead to the insurer losing money when their premium income cannot cover the amount they need to pay out for claims.
That’s why insurers perform very detailed research when creating class codes, taking not only industry risks and hazards into consideration, but a slew of other business characteristics as well, including but not limited to the company’s payroll, gross sales, property size, employee count, and much more. generalliabilityinsure
How Do Insurers Use Class Codes?
To reiterate, the purpose of creating this classification system was so that insurers could group the businesses they insure in order to have the rate for each class clearly reflect the risks and hazards that those businesses have in common.
Essentially, understanding the purpose and importance of general liability class codes makes it easier for you to understand the underwriting process in general.
The primary goal of underwriting is to find a balance between the business’s exposure to risks and the premium insurers are going to charge the business to provide coverage for these risks. This means that the foundation of underwriting is being able to properly classify businesses so that the exposure matches the premium.
Insurance companies can deny coverage to a business because of its class code, and they are also free to add exclusions into the coverage that they do offer, which means that they can choose to deny coverage for specific risks and damages resulting from activities that aren’t covered by the business’s class code.
For example, imagine you own a car dealership and have recently purchased general liability insurance for your business. Later that year, you decide to add auto repair services to your business. If you or one of your workers gets injured repairing cars, there’s a good chance that your insurer might not cover your claims because the loss was the direct result of you and your employees performing tasks outside your policy’s assigned class code.
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