Why It’s Important to Find the Right Risk Class Codes

I wish I could say that it doesn’t happen every day but ‘It happens every day’ that we are asked to quote risks that have been (for years) incorrectly rated. As an agent, I can’t help but think to myself when I see such things that the licensing exam for agents is just too easy or the follow up continuing education and training programs available to agents are just horrible. The only other logical explanation is that agents are purposefully and fraudulently writing policies incorrectly to get lower premiums for clients but putting their agencies at risk and the client at risk for a lawsuit in the process and I just refuse to accept the fact that this many agents are just blatantly doing such things.

Back on track here, Daniel remember why we came here.

Okay, so why is it important to find the right class codes?

Commercial insurance is very black and white and much less forgiving than personal insurance. If you have car insurance and let your buddy drive your car and he causes an accident most personal insurance carriers will cover the loss, ask some questions about why he had the car, and after some investigating move on with day to day activities. Now flip that to commercial and let a buddy drive your car who isn’t a listed driver and then you find yourself with a declined claim especially if you cannot show affiliation with your business and sometimes this would even apply to employees that the insured forgot to call and add after hiring. It’s just very strict and by the book when it comes to commercial.

So, as you can imagine, if your agent isn’t classifying your risk correctly and informing the carrier exactly what they are insuring it can get pretty brutal as well. I see it almost daily where agents get creative or are just simply ignorant of how to classify risk. The reason I am writing on this topic is because I am reviewing a policy that was written with Liberty Mutual as a “Specialty Market” for the last 5 years. No losses (Thank You Baby Jesus) but had there been it could have gotten hairy and at the very least would have caused increased premiums. Liberty Mutual’s definition of a specialty market is any store selling specialty food items and this particular store sells European and Mediterranean foods that would, by some, be considered specialty items so this looks, on surface level, to be a great classification for this risk, BUT, and this is a big BUT, why this particular client does not qualify for that category is because they sell meats and cheeses and prepare homemade dishes and other food items for consumption every day. To qualify, by LM definition, for their current class they should only be selling prepackaged foods from other providers. So you can imagine the surprise they had when they got my quote for $6100/year for business owners’ policy when they were used to paying $2700/year. Additionally, the policy had not been audited for several years and the premiums were based on $250,000 in sales when they were doing nearly $1,500,000 in sales but that’s another topic. My point here is that sometimes risk classes have nuances that an experienced agent can identify and not all agents should be writing commercial risk because of these things. There is a lot more exposure to the agency for writing things incorrectly but also a lot more exposure for the client because a declined claim could result in crippling their business and losing it altogether or tying them up in lawsuits from their vendors, landlords, and other people they do business with because of lack of insurance coverage (I have seen this happen due to lease agreements and vendor contracts). Either way, you want to know it’s correct and then focus on making sure the premium is good.

Additionally, we found that this particular client’s workers’ compensation was rated as Retail Stores – Not otherwise Classified. Now, this market is a retail store and I bet under retail store they didn’t find market or grocery or anything of the sort because the insurance risk class definition of a retail store is more like a Best Buy, Walmart, Target, etc People are retailing someone else’s products. This store has milk, eggs, dairy, wine, breads, bakery items, meats, cheeses, and deli items – I would think we can all agree it has the exact same makeup of what all of us consider a Grocery store. So when you switch the workers comp class code to align with the risk now the cost per 100 of insurance is $2.42 vs $1.39 that had been used in the past and additionally the old agent, again, hadn’t audited the policy and was using $68000 of payroll when his 2019 numbers indicated closer to $225,000 of payroll (excluding owner payroll). So now I am also presenting a corrected worker compensation for $5400/year when they are used to paying $1300/year.

In comes the frustration. So now the customer is frustrated with me because I am basically telling them their $4000/year premium should have been closer to $12000/year and that their agent has been writing it incorrectly and, remember, I am a complete stranger, for the most part, telling them this. I have very little rapport at this point, very little trust, all they see is I am tripling the rate and essentially being the guy that everyone fears and they automatically go to a place where I might be trying to rip them off.

So what makes this exponentially even worse is most, not all, will continue with their agent with the lower premium and continue to be underinsured and incorrectly insured until a claim happens and then nobody can save them. Then they go tell all their friends how bad insurance agents and carriers are and it further makes it difficult for those of us trying to do the right thing to accomplish their job and affirms to the public that they should go to a call center carrier who lets them pic their own coverage without guidance and cut out the middleman because all agents stink and don’t help anyway.

The moral of this story is that you need to research your insurance agents. You need to make sure they have commercial insurance experience and they know what they are doing. For a small start-up business the crumby ones can get away with crappy policies for a while because those owners have nothing to lose but once you get to the level of 7 figures and you have a lot at stake you don’t want a claim to bring it down like a house of cards.

We hope these posts help give you examples of what to look for when you are shopping. If you are in Nevada, Arizona, Kansas, or Missouri we would love to be a resource for your own personal and commercial insurance planning and help you shop around your options and find the best possible policy.

Thanks for reading! Until next time…

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