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					General Liability



        Classification
        Rules Clinic


        Presented by Penny Martin
General Liability –
Classification Rules Clinic

             Payroll Exposure                         Sales Exposure
   Legal Entity, Owners and Officers      Sales Inclusions and Exclusions
   Contractors Executive Supervisors      Manufacturing with Retail
   Interior Carpentry Classification       Operations
   Insured Subcontractors
                                           Installation, service or repair of
   Uninsured Subcontractors                named insured products
   Leased and Temporary Personnel          (Manufacture Risk)
   Contractors that pay Mobile
    Equipment Operators                    Installation, service or repair of
   Draftsman
                                            merchandise sold or distributed by
                                            insured (Mercantile Risk)
            Cost Exposure
   Insured subcontractors                            Other Issues
                                           Risk with two exposure bases,
                                            sales and payroll
Payroll Base Exposures

   Legal Entity, Owners and Officers
   Contractors Executive Supervisors
   Interior Carpentry Classification
   Uninsured Subcontractors
   Leased and Temporary Personnel
   Contractors that pay Mobile Equipment
    Operators
   Draftsman
Payroll Exposure - Legal Entity

   In order to determine who the owners are,
    you must first verify the legal entity.
   Verifying the legal entity of the named
    insured is a very important starting point.
   Underwriting should be notified if the named
    insured doesn’t match the records being
    audited.
Payroll Exposure - Legal Entity

   Insured may have many “DBA” companies under
    one legal entity.
   Most General Liability insurers do not have a
    “specific operations” exclusion endorsement. All
    operations performed by insured’s legal entity,
    should be included in audit remuneration.
   Regardless of DBA or classification codes listed on
    the policy, everything must be reported on the audit
    worksheet!
Payroll Exposure – Owners
(sole proprietors)

   Owners in Texas are considered to be
    Husband and wife
   If both are active in the business, daily
    activities must be provided to determine if
    owner payroll charge applies for each, and to
    determine the correct classification code.
Payroll Exposure - Partners
(Partnership)

   Partners are individuals that have created a
    legal partnership for business.
   Each active partner’s daily activities must be
    provided to determine if owner payroll charge
    applies and to determine correct
    classification code for each.
Payroll Exposure - Executive Officers
(Corporation)

   Executive officers of a corporation are those
    persons holding officer positions created by
    the named insured’s charter, constitution or
    by-laws or any other similar governing
    document.
   Daily activities must be provided, for each
    executive officer, to determine if owner
    payroll charge applies and to determine the
    correct classification code for each officer.
Payroll Exposure - Managing Members
(Limited Liability Companies)

   Limited Liability Companies may be
    organized in several ways.
    –   First you must determine how the entity is
        organized to understand the ownership structure
    –   Is the LLC structured like a sole proprietorship,
        partnership or corporation structure?
    –   Then ask questions about the daily duties of the
        managers, members, or whatever the owners call
        themselves.
Payroll Exposure – Owners, Partners,
and Exec Officers


 The difference between owner coverage for
  general liability and workers’ compensation
          is that under general liability,
                 owners/officers
 cannot elect to be excluded from coverage
Payroll Exposure – Owners, Partners,
and Exec Officers


                  Exceptions

   Owner payroll charge may be waived for
  General Liability computation if the following
                 criteria are met:
Payroll Exposure – Owners, Partners,
and Exec Officers

                       Owner Charge Exceptions
   If owner/officer has exclusive clerical, outside sales or driving
    duties and another owner charge exist within remuneration
   Owner/Officer does not oversee daily operations of the
    company and does not have administrative or managerial
    responsibility of construction or erection projects
   Insured must have employees. If insured uses only contract
    labor and subs, owner charge can not be waived
   If the insured has a layer of supervision between themselves
    and the employees. However, executive supervisor
    classification should be considered for owner if actively
    overseeing the day to day operations
Payroll Exposure – Owners, Partners
and Exec Officers

   Seasonal Operations – Some companies
    allow for owner payroll amount to be reduced
    2% for each full calendar week in excess of
    12 during which the Insured’s business
    performs no operations.
   Owner charge may be pro-rated based upon
    their start and termination dates of their
    owner status.
Payroll Exposure - Owners, Partners
and Exec Officers

State mandated owner payroll amount must be
  charged for each active owner, partner, and
  executive officer when products/completed
  operations coverage is included. (Some
  exceptions may apply)


Refer to ISO CGL Manual Rule 24.E.2
Payroll Exposure - Owners, Partners,
and Exec Officers

                  Reminder

 Insurer Company guidelines should be reviewed
          before owner charges are waived

  May want to include on worksheet and add
 Underwriting Review for consideration to exclude
Payroll Exposure –
Contractors Executive Supervisors


   Contractors executive supervisors code
     is misapplied more than any other
             construction code.
Payroll Exposure –
Contractors Executive Supervisors

Two main reasons for misuse of the
   Contractors Executive Supervisors code are
1. Worker Comp rate is usually lower than
   other construction codes
2. Classification is based upon title instead of
   actual daily activities of the employee
Payroll Exposure -
Contractors Executive Supervisors

 Contractors – Executive supervisors or
 executive superintendents is defined as
 having administrative or managerial
 responsibility for construction or erection
 projects. Supervisory control is done through
 job superintendents or foremen.
Payroll Exposure –
Contractors Executive Supervisors

     This classification doesn’t apply to individuals
      having direct responsibility of daily construction
      operations.
     Contractors Executive Supervisors class is only
      available for executive supervisors or
      construction superintendents with administrative
      or managerial responsibility for construction and
      erection projects.
Payroll Exposure –
Contractors Executive Supervisors

     This classification does not apply to any person who is
      directly in charge of construction operations.
     This classification is applicable only to executive
      supervisors who do not exercise direct supervision of
      construction or erection operations. Typical duties of an
      executive supervisor may include time spent in an office as
      well as job site (s) visitations, to check on construction
      progress.
     Layers of management must exist. Auditor should
      specifically list job site foreman for each crew.
Payroll Exposure –
Contractors Executive Supervisors


   This classification is what ISO describes as a
    N.P.D. (No Payroll Division) classification.

   For general liability, the payroll of individuals
    assigned to this classification may not be
    divided with another classification.
Payroll Exposure –
Contractors Executive Supervisors


           Communication is key
  in determining if employees qualify for this
                   classification
Payroll Exposure –
Contractors Executive Supervisors

   Be consistent with application of classification for
    both WC and CGL.
   Determine and list specific daily activities for
    executive officers – do they visit clients, job sites, etc
   Verify and explain layers of supervision. Usually
    there are three, but there must be at least one layer
    between Executive Supervisor and workers.
   Never list job duties as “administrative”
Payroll Exposure –
Contractors Executive Supervisors


   Don’t apply this classification for estimators
    and outside sales employees.

   Determine if duties were performed before
    construction began?
Payroll Exposure –
Interior Carpentry Classification

Interior Carpentry
  Operations include the installation of wood
  trim, cabinets and countertops, wooden
  flooring, sanding and scraping of wooden
  floors, doors, and paneling. Other operations
  may include wooden staircases being built at
  the job site, installation of locks and cabinet
  hardware, and weather stripping.
Payroll Exposure –
Interior Carpentry Classification


    This classification does not apply to
                  contractors
                 responsible
           for any other carpentry
   operations at the same job or location.
Payroll Exposure –
Interior Carpentry Classification

Example:
Residential general contractor uses
  subcontractors to perform all carpentry
  operations other than interior carpentry work.

General contractors employees perform only
 interior carpentry work
Payroll Exposure –
Interior Carpentry Classification

General contractors employees, that perform
 only interior carpentry work, shall be
 classified as

Carpentry – construction of residential property.

     NOT Interior Carpentry classification
Payroll Exposure –
Uninsured Subcontractors


      Uninsured subcontractor wages
         shall be classified as payroll,
       in the appropriate classification
  that best describes the work performed.
Payroll Exposure –
Leased and Temporary Personnel

      Leased labor and temporary company
           employees are not considered
      an “adequately insured subcontractor”
            for premium computation.

Even if GL certificate of insurance is presented.

Refer to ISO CGL Manual Rule 24.E.2
Payroll Exposure –
Leased and Temporary Personnel

   Insured has direction and control of leased
    and temporary personnel

   Since employee leasing and temporary labor
    companies are not construction companies,
    their General Liability coverage does not
    match that of a contractor liability policy
Payroll Exposure –
Leased and Temporary Personnel

Leased Workers Exposure
 The total payroll wages of leased workers
   furnished to the insured by the leased
   labor/personnel company
 If the payroll can’t be determined from the
   insured’s records, use 100% of the total
   cost of the contract between insured and
   the leasing company
Payroll Exposure –
Leased and Temporary Personnel

Temporary Employee Exposure

   Temporary workers wages plus temp fees
    should be included for payroll exposure

   These records can be verified by insured’s
    General Ledger or check book register.
Payroll Exposure - Contractors
that pay Mobile Equipment Operators

When contracting risk rents mobile equipment
 from another entity
     A payroll charge must be made
Because the mobile equipment operator will be
    under direction and control of the hiring
                   contractor

Refer to ISO CGL Manual Rule24E.2.1
Payroll Exposure - Contractors
that pay Mobile Equipment Operators

This includes
 both insured and
 uninsured subcontract mobile equipment
  operations
            such as a crane company
             Installing steel beams
         Insured must give direction on
      how and where beams will be placed
Payroll Exposure - Contractors
that pay Mobile Equipment Operators

Payroll should be included for
 equipment operators and
 their helpers


       when payroll is the premium base
                       for
             insured’s operations
Payroll Exposure - Contractors
that pay Mobile Equipment Operators

   If payroll of mobile equipment operators is
    not available
   1/3 total cost should be used
   Payroll exposure shall be classified under
    appropriate code that best describes the
    insured's operations at that location
Payroll Exposure -
Draftsman

 General Liability classification rule differs from
    Workers Compensation, when it comes to
         drafting and clerical employees
 Clerical & drivers wages are a general
  exclusion for CGL payroll exposure (unless
  code description or notes specifically state to
  include)

Refer to ISO CGL Manual Rule 28.B.3.b
Payroll Exposure -
Draftsman

   Employees with exclusive draftsman duties,
    should not be excluded with clerical
    employee wages
   Wages for draftsman, with no exposure to job
    site hazards, shall be classified under code
    91805 Draftsmen
Cost Exposure –
Insured Subcontractor

Unlike other contractor classification exposures
Insured Subcontractor Exposure
                    is not
           based on payroll
Cost Exposure –
Insured Subcontractor


     Insured Subcontractor exposure
            Is based upon
             Total Cost
Cost Exposure –
Insured Subcontractor

Total Cost Defined

Total Cost of all work let or sublet in connection
   with all specific projects including:
Cost Exposure –
Insured Subcontractor

1.   All materials
2.   labor, and equipment furnished, used or delivered for use in
     the execution of the work, and
3.   Cost of materials and equipment purchased or rented by the
     insured, to be used in connection with the adequately insured
     subcontractor’s portion of the job. This amount must be
     obtained from insured’s records and added to cost amount for
     the adequately insured sub.
4.   All fees, bonuses or commissions made, paid or due and
5.   Payroll for mobile equipment operators and their helpers

Refer to ISO CLM Manual Rule 24.32.1 ISO CLM
** this rule may vary by company**
Cost Exposure –
Insured Subcontractor

The classifications applicable to subcontractors
  hired by the insured only apply if the
  subcontractors are
 adequately insured and
 provide verification by Certificates of
  Insurance
 Insurance binders and declaration pages
  should not be used for verification
Cost Exposure –
Insured Subcontractor


   Classification for adequately insured subs
      should be determined by the named
        insured’s operations, not by the
              subcontractor’s work.
Cost Exposure –
Insured Subcontractor

Insured Subcontractor classification codes
 Installation service or repair
 Apartment or office building
 Buildings
 Buildings for industrial use
 Not buildings
 One or two family dwellings
Sales Base Exposures

   Sales Inclusions and Exclusions
   Manufacturing with Retail Operations
   Installation, service or repair of named
    insured products (Manufacturing Risk)
   Installation, service or repair of merchandise
    sold or distributed by insured (Mercantile
    Risk)
Sales Exposure –
Sales Inclusions and Exclusions

Inclusions                      Exclusions
 Total sales of consigned       Sales or excise taxes, paid
   goods and warehouse            to insured and submitted to
   receipts                       a governmental agency
 Trade or cash discounts and    Freight Charges, if itemized
   bad debts                      separately on invoice
 Foreign Exchange discounts     Credits for repossessed
 Freight allowance to            products and returned
   customers                      merchandise
 Amount collected for           Finance charges for
   repossessed items sold on      installment based sales
   installment basis
Sales Exposure - Manufacturing with
Retail Operations




The rules regarding auditing of manufacturing
 and processing risks can be found in the ISO
             CGL Manual Rule 27
Sales Exposure - Manufacturing with
Retail Operations

     Manufacturing and Processing Risk –
     Classification and Premium Computation
     Procedures.
For Classification Assignment Purpose
1.   This rule shall apply separately to each named
     insured included in the policy
2.   Determine the classification(s) which best describes
     each named insured’s final product(s) or process(s)
Sales Exposure - Manufacturing with
Retail Operations

3.   Do not separately classify component parts
     or interim processes of the manufacturer if
     incorporated into the insured’s final product.
     Especially if such processes or parts are
     normally performed by the that type of
     product manufacturer

Refer to ISO CLM Manual Rule 27.B.2
Sales Exposure - Manufacturing with
Retail Operations

4.   If a named insured sells its own
         products through its own retail
         operations, classify the
         manufacturing or processing
         operation separately in
         accordance with this rule and
         separately classify and rate the retail
         operations in accordance with manual rules.

Refer to ISO CLM Manual Rule 27.A.3
Sales Exposure - Manufacturing with
Retail Operations

For Premium Computation Purpose
1. Manufacturing and processing
   classifications are rated on a “Gross Sales”
   basis
2. Gross Sales” are to be determined for each
   classification developed
Sales Exposure - Manufacturing with
Retail Operations

Sales Inclusions
 Sales of goods or products from one
  company to another
 Sales from one named insured to another
 Wholesale value of goods transferred to the
  retail operation

Refer to ISO CGL Manual Rule 24
Sales Exposure - Manufacturing with
Retail Operations

Sales Exclusions & Exceptions
 Do not include the sales of goods or products
  from one named insured to another in the
  premium computation for products/completed
  operations coverage when inter-company
  products suits are excluded from coverage
  by Exclusion Endorsement
CG 2141 - Inter-company Products Suits
  Endorsement - Exclusion
Sales Exposure - Manufacturing with
Retail Operations

Sales Exclusions & Exceptions
 Do not include the value of any transfers of
  component parts or interim processes within
  the same named insured
Sales Exposure –
Installation, service or repair of named
insured products (Manufacturing Risk)


      Servicing or repair of named insured’s
    product, is a special classification inclusion
    and should not be separately rated, unless
          exception is listed in footnote.


Refer to ISO CGL Manual Rule 27.1.D.2
Sales Exposure - Installation, service
or repair of merchandise sold or
distributed by insured (Mercantile Risk)

Contractor rules do not apply to Mercantile Risk
       Unless footnote states otherwise

   Avoid adding contractor codes for installation,
    service and repair to a mercantile risk
   Regardless of who completes the work, employees
    or subcontractors

Refer to ISO CGL Manual Rule 29.C
Sales Exposure - Installation, service
or repair of merchandise sold or
distributed by insured (Mercantile Risk)

Basis of premium for mercantile risk is “Gross Sales”.

    When a mercantile risk is involved with installing,
         servicing or repairing the goods they sold,
 separate payroll classification should not be used
            unless directed to do so by footnote.
This is an exception to the multiple enterprise principle.
Sales Exposure - Installation, service
or repair of merchandise sold or
distributed by insured (Mercantile Risk)

Example:
              A carpet store
   that installs the rugs and carpets
    they sell, classified as Mercantile
           floor covering stores
Sales Exposure - Installation, service
or repair of merchandise sold or
distributed by insured (Mercantile Risk)
        Separate classification for the installation
            of carpets should not be added,
  even though such a classification exists, whether the
     carpeting is installed by employees of the risk,
   adequately or inadequately insured subcontractors.

 The only basis of premium for this risk is gross sales.
Other Issues – Risk with two exposure
bases, sales and payroll

Some Manufacturing Risk have both gross
  sales and payroll exposure bases.

Manufacturing rate for gross sales does not
 contemplate installation, service and repair
 operations.

Refer to ISO CGL Manual Rule 28.B.3.D
Other Issues – Risk with two exposure
bases, sales and payroll

Payroll of employees engaged in the
 installation, service & repair of the
 insured’s manufactured products shall
 be separately rated. If an employee’s
 work involves more than one
 classification or with a different
 exposure bases, assign entire payroll to
 appropriate code to payroll base.
Other Issues – Risk with two exposure
bases, sales and payroll

 Example:

   Sign Mfg Company that also
  performs installation, service and
               repair
Other Issues – Risk with two exposure
bases, sales and payroll



Sales Inclusions – sales for making signs

Sales Exclusions – sales tax, freight and
 installation if records provide
 separation. If not, use gross sales.
Other Issues – Risk with two exposure
bases, sales and payroll

   Payroll Inclusions - installation, service
    and repair labor.
Workshop Examples

				
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