Liability premiums for commercial policies are calculated using elements that relate to the actual operation to be covered. In some cases, this is based upon total square footage for “lessors risk only” properties; in others it is based upon number of units for apartments and condos and others are rated based upon gross sales or payroll.
Our focus in this article is on the latter; those risks that are rated based upon the gross sales or payroll. The premium charges for risks based upon these figures are “estimates” provided by the insured that anticipate what their results will be for the upcoming year. Therefore, it is very important that these figures are accurate representations of their intended exposures. This is not an exact science, but should be an “educated guess” to take into consideration many elements that will impact their business results. If payroll or gross sales is underestimated or a wrong classification code is used, additional premium will be due to Rockford Mutual Insurance Company when the premium audit is completed.
In order to avoid these uncomfortable situations, the following tips are offered:
♦ Ask the prospect/insured for a complete list of all business operations for the past three years and their last 10 jobs/projects. This will serve as the basis for determining what type of work they have done and what they plan to do in the upcoming year. Class codes should be selected based upon:
• Conpac/Ropac – If the prospect/insured does work that applies to more than one classification, determine which one has the highest rate. The payroll or gross sales should be applied to that classification. We do not allow these figures to be “split” among classes and it is standard industry practice to pick the highest rated class. If less than 20% of their operations are in the highest rated class, speak to your underwriter for guidance.
• Commercial Package Policy – If the prospect/insured does work that applies to more than one classification, then you should list all the classes that apply and the premium will be applied accordingly. However; if the only worker is the owner, we cannot split the payroll between classes for one person.
♦ If you are unsure about the figures that you were given, ask your Underwriter to conduct a loss control survey to confirm operations and number of employees. It’s in your own best interests to make sure you know what you are covering as the agent and in turn want to protect your profitability results.
♦ Ask the prospect/insured if they plan to expand in the upcoming year. If so, then make sure the payrolls or gross sales are selected to reflect this increase in operations. Likewise, reductions in operations should result in lower estimates as well. This will help to avoid large premium adjustments at audit time.
♦ Touch base with the insured 4-6 months into the policy term to see how their year is progressing. Use this opportunity to ask if they want to adjust payroll or gross sales at this time to eliminate large premium adjustments. This will allow them to “cash flow” the change through the remaining months, rather that needing to pay a lump sum at audit time.
All of these items will help to eliminate “surprises” at the end of the policy term and also should help to improve retention rates in your agency. If an insured knows you are watching out for their bottom line throughout the year, they will be more likely to stay with RMIC and your agency for many years to come.
