Correct Classifications: A Key to Construction Risk Management
Correct Classification is Crucial
“What do you do?” – It’s a question as old as time and as basic as the ABCs. It may seem like a mundane, simple question to ask, and hopefully should be relatively easy to answer. When it comes to your property and casualty insurance, you want to make sure you’re able to fully answer this question. Having the correct classifications is crucial to the success of your risk management program.
First of all, an insurance carrier won’t be able to properly underwrite your business if the appropriate classifications aren’t used. The majority of the premium insurance companies seek should be based upon an insured’s expected losses.
One of the methods by which underwriters can try to predict expected losses and rate their potential customers is classification. Classification is a method in which a group of similar risks and their loss experience are observed over a period of time to estimate costs. Think about if you were classified in a higher risk group than you actually should be – your premium would be incorrectly inflated. There’s also a flip side to this scenario.
Being incorrectly classified as a lower risk may save some premium dollars upfront, but it could cost you dramatically in the event of a loss. It’s not only important to know how your business and employees should be classified but that the broker working on your behalf is knowledgeable in this area as well. Insurance carriers trust the information given to them by brokers and insureds. If it’s found that a party knowingly misclassified a risk and there is a loss, then the insurance company could potentially decline the claim due to misrepresentation. Depending on the severity of an uncovered loss, it could put the insured in real danger of going out of business.
Another reason why correct classifications are important? Your risk management team can better tailor a program around your company’s specific needs. Safety training will be more effective and efficient if it’s developed for and directed at the correct places. If you ever have any doubts about how your business and employees should be classified, an independent audit can be conducted. You can order an audit through a third party, such as the NCCI, especially since workers’ compensation classifications can be especially tricky in certain situations.
Just remember, those questions of “what do you do” and “what do your employees do” are extremely important to the success of your insurance and risk management program. Even though they may seem like questions with easy answers, brokers and insureds may want to take some time to more fully develop those answers for a truer picture of a risk.
Source: Risk Classification Standards by Michael A. Walters in the Casualty Actuarial Society Proceedings from May 17-20, 1981. Volume LXVIII, Part 1, No.129.
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