Author, Matt Gorham, Account Executive, Rancho Mesa Insurance Services, Inc.

Within the construction industry, it is common for questions to arise about how to categorize work that a contractor performs. While organizations like the Insurance Service Office (ISO), Workers’ Compensation Insurance Rating Bureau (WCIRB), and the National Council on Compensation Insurance (NCCI) have created classification systems, nuances in worksite demands can lead to confusion about which class code to use for a given business’s operations.

Even though many types of work have similarities, mistakes in classification can lead to:

1. Problematic coverage exclusions

2. Surprise audit bills

3. Overpaying insurance premiums

General liability class codes differ between types of work, such as commercial/industrial plumbing and residential plumbing, or heating and air conditioning with or without liquefied petroleum gas.

Problems can arise for businesses when their coverage fails to match the work being performed, especially when certain endorsements are included within their policies. When a loss happens in this situation, a carrier may deny coverage, leaving the business to respond to the damage or injury on its own.

We recently started working with an HVAC contractor that had previously found themselves on the wrong end of this scenario, having incurred over $350,000 in property damage costs because they were held responsible for flooding an apartment while moving a water line. Their previous carrier denied the claim because of a coverage limitation endorsement, which specifically limited coverage only to the classification codes listed on their policy.

In severe cases, a carrier may also choose to cancel or non-renew coverage for the business if they learn that the business’s operations are heavier or significantly different than what was previously represented.

Like general liability, workers’ compensation class codes can also cause challenges for contractors.

Consider the example of an HVAC contractor. Their workers’ compensation payrolls could easily be categorized into either 5183/5187 or 5538/5542. There is a subtle difference that separates whether payroll should be classified within the plumbing class codes or the sheet metal class codes. However, there can be a substantial difference in the corresponding premium a company would pay for workers’ compensation, especially when you consider that these classifications are subject to different dual wage thresholds.

An HVAC company with a technician getting paid $32 per hour whose payroll is classified as 5187 could expect to pay premiums from a $4 to $5 base rate per $100. Another HVAC company with a technician getting paid the same, but categorized as 5538 could expect to pay premiums from a $10 to $12 base rate per $100. While the lower rate may at first be appealing, if payroll is improperly classified throughout the policy term, an audit could lead to a substantial additional premium, so it is best that you classify your work correctly from the start so that your premium properly reflects the risk of the work being done.

Plumbers often encounter a similar classification challenge. Should they be categorizing payroll under the plumbing class code only? Do they have any sewer or excavation exposure? That depends on some key details in their operations and will directly influence which carriers are willing to partner with them and how aggressively they price their coverage.

Rancho Mesa recognizes the importance of proactively working with accurate, complete information. To better serve the needs of our clients, we have developed a comprehensive submission and renewal process, which includes:

• Pre-renewal meetings 90 to 120 days before the renewal date to understand any changes in the business

• Industry specific supplemental applications to gather more thorough and relevant information

• Open, honest communication with carrier partners that fosters trust and transparency

• Policy reviews and audits to identify potential coverage issues

To request a policy audit, and ensure that the coverage and pricing for your insurance program properly aligns with your industry, contact me at (619) 486-6554 or mgorham@ranchomesa.com.