As a business owner, it is natural for you to always be looking for ways to make a profit. Sometimes these ideas come in the form of new products and services that you can provide to customers.
Innovation is important in any industry, but there might be one small hitch in your plans. Does your current insurance policy cover the new service or product? How can you tell?
General Liability Policy Hazards
On your general liability policy (or your package policy that includes liability) there is usually a page that lays out the hazards and rates. This page includes the following:
Class Code. This is a five-digit code number that is assigned to each and every industry component. What your business does will fit into one or more class codes. For example:
91560 – Concrete Construction
97447 – Masonry
Some are even more specific, such as restaurants, where classification options include whether alcohol is sold, how much is sold, and whether there is table service.
Description. This is a brief description based on the class code number.
Rating Basis. This is where your premium amount comes from. Each class code has a basis, which can be area, subcontractor costs, payroll or gross receipts.
Rate. This is how the premium is calculated. Insurance companies set rates for class codes and then multiply them by the rating basis to get the premium they will charge.
It is a good idea to review this page with your insurance broker to be sure that your business is classified correctly and that all components of your business are accounted for. Sometimes insurance companies will place a Classification Limitation Endorsement on your policy, which can be a problem.
Classification Limitation Endorsement
The Classification Limitation Endorsement (often called the Limitation of Coverage to Designated Classification(s) Endorsement) can look fairly unassuming. It is a short endorsement that holds a lot of power over how your policy works.
This endorsement limits coverage on the policy to only those classifications listed on the declarations page of the policy. If you fail to list a classification on the policy and your claim is associated with that aspect of your business, there is no coverage.
If you should decide to add new operations to your business, it is a good idea to call your insurance broker. Talk about whether this endorsement is on your policy and also how new operations will affect your coverage.
Why You Should Add New Classifications
Once upon a time, a pest control company requested a certificate of insurance for a client. The company owner asked that the broker note on the certificate that the pest control company did “feral animal removal”.
While feral animal removal is a legitimate business, it is not something that typically falls under the scope of your standard pest control company, and had not been disclosed to the broker prior to the certificate request.
With the classification limitation endorsement on the policy, operations associated with feral animal removal were not covered. Another wrinkle is that feral animal removal was not a class of business his current insurance carrier wished to cover.
The solution? The client’s coverage had to be rewritten through another insurance company with the new classification included so that coverage could be afforded for this facet of his business.
Whether you are starting a new business or looking to expand your current business, it is a good idea to cover all of your operations. To be certain that your insurance coverage is the right fit, contact your broker. Hayes Brokers offers free, no-obligation risk management analysis meetings to discuss your current coverage and whether it truly fits your needs. Call for an appointment today.