General liability insurance class codes are a way for insurance carriers to classify risk based on the work a company does. Every business has differing types and degrees of risk. The class codes help insurance carriers assign an appropriate premium rate, offer the correct type of coverage, and determine any exclusions, if necessary.
How General Liability Class Codes Work
No matter which catalog of class codes, such as Insurance Services Office (ISO) or North American Industry Classification System (NAICS), that an insurance carrier uses, they all do the same thing. They assign a number corresponding to your company’s industry and type of work, and each number has an associated risk premium. The insurance company uses this as the basis for determining the amount to charge for your business’s general liability policy.
For example, some broad sample categories listed in the ISO are:
- 10000-19999: Mercantile
- 40000-49999: Miscellaneous
- 50000-59999: Manufacturing or Processing
- 60000-69999: Building or Premises
- 90000-99999: Contracting or Servicing
If we use the NAICS, we see sample codes like:
- 11: Agriculture
- 23: Construction
- 44: Retail Trade
- 51: Information
- 72: Accommodation and Food Services
These broad groups are then broken down into smaller, more specific listings. For example, looking at the NAICS codes for Group 72 (Accommodation and Food Services), a bed and breakfast inn would be classified by code 721191 while a caterer would be classified by code 722320. These subgroupings help identify the specific risks for that particular type of business because while they both still fall within the same industry, they have different considerations.
You can find your company’s class code by visiting one of the classification sites, such as NAICS. Begin by finding the overall industry your business falls in, and then click through the subcategories to find a description of what your business does.
General Liability Class Codes in Action
In the examples provided above, both types of businesses fall under the general category of Accommodation and Food Service. But when you look at what a bed and breakfast business does compared to a catering company, they have distinctly different risks involved in their daily operations.
A bed and breakfast would be concerned with risks, such as someone tripping and falling on the property, whereas a caterer is more concerned with foodborne illness risks. Either can happen with both types of companies, but the chance of one happening is greater for a specific company.
Understanding class codes is essential to understanding their exclusions as well. If your company is identified as one class code, it might not be covered for performing work that falls within another class code. For example, if your business is classified as a painting company, you might not be covered for accidents that happen while performing work as a general contractor. Disclosing to the insurance carrier all activities that your business performs regularly and occasionally ensures your business has the proper general liability coverage.
Who Determines Your General Liability Class Code?
Insurance companies don’t use a universal method or system of class codes. The most commonly used systems include:
- National Council on Compensation Insurance (NCCI)
- Standard Industrial Classifications (SIC)
Some insurance carriers may even use their own proprietary codes to classify businesses.
The classification should be based on what your company regularly does as its primary offering of business. So, while an accountant may provide payroll services on top of their primary bookkeeping duties, they will get listed for their primary activity.
What Happens If My Operations Change?
If your primary business activities change, it is essential to notify your insurance carrier so that they can reunderwrite the policy and make sure you have the correct coverage. If a carpenter (SIC class code 1751) ends up getting a general contractor’s license (SIC class code 1521) and expands their business, they will no longer be listed as a carpenter on their class codes. The insurance carrier will adjust the policy and rates based on the new class code 1521. This adjustment reflects the change in risk that a general contractor has compared to a carpenter.
Failure to notify the insurance carrier could result in a problem when it comes time for a claim. If the insurance carrier weree unaware of what you did as a primary job duty, it could deny the claim stating that you misrepresented your business to them. Be sure to check your declarations page to see what class your business is listed as to ensure you are covered properly.
How General Liability Class Codes Impact Your Premium
Insurance carriers base premiums on risk. The higher the risk of your industry or occupation, the higher your premium will be and vice versa. For example, an accountant sits at a desk all day in an office with few hazards compared to a general contractor with tools, supplies, and equipment as hazards on every job site.
To reduce your premiums, it’s best to have safety programs in place and keep claims down. Insurance carriers may offer discounts to those who are claim-free. Whatever you can do to reduce risk will help keep insurance costs down.
Class codes are an important way that insurance carriers define risk based on industry duties and hazards. Determine your class code is to make sure your most regular business operations are identified. If your insurance carrier has misclassified your business, you could be overpaying.