General liability insurance class codes, or classification codes, are numbers that insurers use to classify a business’ industry risk based on the primary type of work it performs. Insurance companies also use general liability class codes to determine the premium, offer the correct type of coverage, and decide on any exclusions, if necessary.
How General Liability Class Codes Are Determined
There isn’t a universal method or system of class codes. Some insurance carriers may even use their own proprietary codes to classify businesses. The most commonly used systems come from the following organizations:
- Insurance Services Office (ISO)
- National Council on Compensation Insurance (NCCI)
- North American Industry Classification System (NAICS)
- Standard Industrial Classifications (SIC)
An organization assigns a number corresponding to your company’s industry and type of work, and each number has an associated risk premium. The insurance company uses this as the basis for determining the amount to charge for your business’s general liability insurance policy.
The classification should be based on what your company regularly does as its primary offering of business. For instance, an accountant may provide payroll services on top of their primary bookkeeping duties, but they will get listed for the primary activity.
Examples of General Liability Class Codes
Some broad sample categories listed in the ISO are:
- 10000–19999: Mercantile
- 40000–49999: Miscellaneous
- 50000–59999: Manufacturing or Processing
- 60000–69999: Building or Premises
- 90000–99999: Contracting or Servicing
If we use the NAICS, we’ll see sample codes, such as:
- 11: Agriculture
- 23: Construction
- 44: Retail trade
- 51: Information
- 72: Accommodation and Food Services
These broad groups are then broken down into smaller, more specific listings. For example, looking at the NAICS codes for Group 72 (Accommodation and Food Services), a bed-and-breakfast (B&B) inn would be classified by code 721191, while a caterer would be classified by code 722320.
These subgroupings help identify the specific risks for that particular type of business because while both examples fall within the same industry, they have different considerations. A B&B would be concerned with risks such as someone tripping and falling on the property while a caterer would be more concerned with foodborne illness risks. Either can happen with both companies, but the chance of one happening is greater for a specific company.
Did You Know?
Understanding class codes is essential to understanding their exclusions. If your company is identified as one class code, it might not be covered for performing work that falls within another class code.
For instance, if your business is classified as a painting company, you might not be covered for accidents that happen while performing work as a general contractor. Fully disclosing to the insurance carrier all activities that your business performs both regularly and occasionally ensures your business has the proper general liability coverage.
How General Liability Class Codes Impact Your Premium
As mentioned above, class codes are part of the formula providers use to calculate the premium. As such, there is a direct relationship between the class codes assigned to your business and the premium you will pay.
This is because insurance carriers base premiums on risk. The higher the risk of your industry or occupation, the higher your premium will be, and vice versa. For example, an accountant sits at a desk all day in an office with few hazards compared to a general contractor with tools, supplies, and equipment as hazards on every job site.
To reduce your premiums, it’s best to have safety programs in place and keep claims down. Insurance carriers may offer discounts to those who are claim-free. Whatever you can do to reduce risk will help keep insurance costs down.
If you’re looking for affordable options, check out our roundup of the cheapest general liability insurance companies. You may also be interested in our list of the ways to save money on business insurance.
What Happens If Operations Change?
If your primary business activities change, it is essential to notify your insurance carrier. This way, it can re-underwrite the policy and ensure you have the correct coverage.
Let’s say a carpenter (SIC class code 1751) ends up getting a general contractor’s license (SIC class code 1521) and expanding their business; they will no longer be listed as a carpenter on their class code. The insurance carrier will adjust the policy and rates based on the new class code 1521—and this adjustment reflects the change in risk that a general contractor has compared to a carpenter.
Failure to notify the insurance carrier could result in a problem when it comes time for a claim. If the carrier was unaware of what you did as a primary job duty, it could deny the claim, stating that you misrepresented your business. Check your declarations page to see what class your business is listed as to ensure you are covered properly.
Frequently Asked Questions (FAQs)
A class code is a number assigned to an industry directly related to the risk of that industry. These codes are then used by insurers to calculate premiums for general liability.
Insurance companies use class codes to help them assess the risk of a business. The code makes sure the business is paying the correct amount for its premium. Also, insurers use class codes to determine the appropriate amount of coverage your business needs.
You can check with your agent to see if your class code is correct. If it isn’t, you can request your agent to update the policy. Premium audits ensure the class code matches your business and allow insurers to make adjustments as necessary.
You can find your company’s class code by visiting one of the classification sites, such as NAICS. Begin by finding the overall industry your business falls in, and then click through the subcategories to find a description of what your business does.
The purpose of the premium audit is to ensure the premium is correct and the coverage is appropriate for your business. Insurers will review your business operations to see if you’ve added or removed any industries and to ensure everything is appropriately classified.
Bottom Line
Class codes are an important way that insurance carriers define risk based on industry duties and hazards. If your insurance carrier has misclassified your business, you could be overpaying. Determine your class code by reaching out to your agent to ensure your most regular business operations are identified.
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