Classifying a Commercial Risk
By Linda Ziegler, Commercial Underwriting Consultant
When you get a commercial application, it may be hard to determine the proper classification for the risk. A commercial underwriter will have to examine the risk and decide which program they will use to quote eligible risks.
One of those programs is the Business Owners Policy (BOP).
A BOP is a package policy, which means both property and liability are covered under one policy. When looking at the BOP, you will need to look at the property and the liability exposures. The BOP’s classes are based on what the insured’s interest is (either as a lessor or an owner) and what the occupancy of the building is.
Once those are determined, you can begin to underwrite the property, looking at construction, location and the types of operations.
You also will begin examining the liability. You may want to see if the insured is making something, selling something or performing a service for their customers. The liability will have varying degrees of hazard based on business activities rather than the building type.
Another program is Commercial Properties (CP).
For risks that qualify for the CP program, you’ll look at the usage of the building and its construction and protection. The proper classification will be based on the occupancy of the building.
You’ll notice there are far fewer classifications under the CP program than the commercial general liability (CGL) program. This is because property types are generally easier to group together in broader risk categories.
For instance, you’ll notice that most retail stores have the same code under the CP program. What they sell doesn’t matter as much as where the building is and how it’s constructed. When you look at that same property risk under the general liability, you’ll want to determine everything that the insured is doing, be it making something, selling something or performing a service. Each operation will need to be rated for separately under the CGL.
Let’s look at two retail stores.
One sells clothes that it receives from a wholesaler and the other is a farm machinery dealer that also does some machinery repair work.
Each of the buildings has similar characteristics in terms of construction and protection. The property rating will most likely look very similar for each of the buildings.
The liability exposures are very different in terms of their hazards. The likelihood of bodily injury or property damage is much less from selling clothes than from the sale and repair of machinery.
Both retail operations would be rated based on their annual sales but the rate for the clothing store will be much lower than the rate for the machinery dealer under the CGL. The machinery dealer also will have at least two exposures to rate for: the sale of machinery and the receipts from the repair work.
The rates will be different for the retail sales and the repair work. If the machinery dealer also fabricates some of the parts used in the repair work, they would have a third exposure to be rated.
The higher the hazards associated with the risk, the higher the rate and the more necessary it is for complete documentation and underwriting of the risk.
It is important to identify all liability exposures and determine if all exposures are eligible for quoting. Generally, we shy away from those that manufacture a product.
In the case of the machinery dealer, you probably would not want to cover the exposure for the fabrication of parts. The highest duty owed when there is a product’s loss falls on the manufacturer of the product. Under almost all circumstances, if you are not willing to write all of the exposures for a single insured, you should decline to quote the risk.
Our All Commercial Eligibility Guide should be consulted when determining which risks may be eligible for quoting. This guide was recently updated and is easier to use. To find the guide, log in to the WRC website and go to Documents>Commercial Underwriting>General. Remember to look at all exposures before deciding which risks to quote.
The WRC Mutual Assistance team is here to help you look at the exposures of a risk and determine which classifications may be appropriate. Please feel free to reach out to us for assistance.