Don't Risk Misclassifying Risks

Tailored Coverage and Covered Claims

By accurately classifying risks, you can ensure your client has insurance coverage that is specifically designed to protect their business needs. If their business is misclassified or does not have adequate coverages based on their operations, the coverage they have in place may not provide enough coverage should a claim arise, and they may be forced to pay out of pocket for any liability and damages.

For example, let's say you accurately classify a client's business as a restaurant and provide them with insurance coverage that includes food spoilage coverage. A few months later, your client experiences a power outage that causes their refrigeration system to fail, resulting in significant food spoilage. Thanks to the accurate classification and tailored coverage, your client's policy covers the cost of the spoiled food, saving them from paying out of pocket for the damages.

Cost Impacts

Misclassifying risks can result in your clients overpaying for insurance they do not need, being underinsured and/or carrying inadequate limits, or even underpaying for insurance resulting in your client being required to pay additional premium following an audit of payroll and operations. By avoiding misclassification, you can help your clients get the coverage they need, and the insurer gets the appropriate premium for the risk characteristics.

One of the most commonly misclassified workers compensation codes is 8810. Generally, this class code should be selected for policies covering clerical office employees and administrative personnel, with no participation in sales or operations. If these clerical and administrative employees routinely walk around a warehouse or occasionally lift boxes or move heavy objects, another class code should be considered. A clerical or administrative employee's work environment is considered the safest, and the price per $100 of payroll reflects that. Use extra caution with lower risk class codes to ensure your client isn't surprised at audit time!

Enhanced Reputation

If your client's business is misclassified, any bound policies are potentially not viable and could be canceled by the insurer, putting your client's business at risk. By consistently providing accurate insurance quotes, you build a reputation as a trusted and reliable insurance agent. This reputation will not only attract new clients but also foster long-term relationships with existing ones.

Clients appreciate your attention to detail and the peace of mind that comes with knowing their insurance needs are well taken care of. As a result, they may refer friends and colleagues to you, helping you grow your client base and establish yourself as a reliable insurance professional.

Reduced Legal Risks

Misclassification can lead to legal issues and potential lawsuits. By accurately assessing risks and providing appropriate coverage, you can help your clients avoid legal pitfalls and protect their businesses from costly litigation. Furthermore, misclassifying a client's business and selling a policy that does not cover their unique risks could lead to legal issues and a potential errors and omissions (E&O) claim for you, the insurance agent.

Let's say you classified a client as a project manager, but they are, in fact, a general contractor. The general contractor is hired to oversee the construction of a commercial building and hires a subcontractor to install the electrical wiring throughout the building. However, due to a mistake, faulty wiring is installed by the subcontractor, resulting in an electrical fire that causes significant damage to the building.

The general contractor is held liable for the property damage caused by the subcontractor's work and the owner of the building files a claim against the general contractor to cover the cost of repairing the damage. The insurance company investigates the claim and determines whether the general contractor is liable for the damages because they hired and oversaw the subcontractor's work.

Since your client was classified as a project manager when their policy was purchased, they do not have the appropriate coverage and limits to cover the costs associated with repairing the fire damages, and they end up paying thousands of dollars out of pocket.

Your client files an E&O claim against you, stating that you did not accurately access their business operations and sold them an insurance policy that did not cover their risk and exposure. You can reduce your legal risk by accurately classifying clients up front.

Peace of Mind

Knowing that their insurance coverage is tailored to their specific risks and needs, your clients can have peace of mind, allowing them to focus on growing their businesses without worrying about potential gaps in coverage.

Suppose you secured coverage for a local hair salon. During meetings with the client, you took the time to understand their business and exposures in detail and realized they also offer tanning services. You explain to the owner that tanning services add an additional layer of risk and suggest they increase their limits to ensure adequate coverage. Months later, the owner calls you in tears because the timer on the tanning bed malfunctioned and a customer was left in the tanning bed too long, causing second degree burns on their back. The owner is relieved to hear this exposure may be covered by their policy.

By accurately classifying their business and providing insurance that includes coverage for the tanning beds, you provide them with the peace of mind they need to focus on growing their business and serving their clients without worrying about potential gaps in coverage. Knowing their insurance coverage is tailored to their specific risks and needs allows them to operate with confidence.

Good Standing

By consistently using incorrect class codes when securing quotes for clients, you are at risk of being prohibited from using specific insurance platforms and/or losing insurer appointments. By providing correct class codes, you demonstrate your professionalism and adherence to industry standards, which strengthens your relationships with insurers and underwriting partners. Additionally, if you are blocked from specific insurers and platforms, you will be limited on the coverage and policy options you can provide to your clients, potentially preventing you from securing the coverage they need and forcing them to work with another insurance agent.

Insurance Portfolio Health

Accurate risk classification is essential for maintaining healthy insurance portfolios across the industry. Insurers carefully manage their portfolios to ensure a balanced distribution of risks. Misclassifying risks can disrupt this balance, resulting in higher premiums for clients or even prompting an insurer to stop offering coverage in certain industries. By accurately classifying risks, you contribute to the overall stability and sustainability of the insurance market.