AU 62 - Ch 2

Three-step Process to assign the proper classification

1. Determine the insured's business operation (usually from the application) 2. Check the appropriate classication in the Classification Table for inclusions, exclusions, and specific classification footnotes to determine whether additional classifications are necessary. 3. Apply additional rules based on the insured's business group.

The five classifications the Commercial Lines Manual (CLM) uses to refine the general liability classification process include all of the following:

1. Manufacturing or process 2. Contracting or servicing 3. Building or premises 4. Mercantile 5. Miscellaneous

A contractor was hired by a railroad to work on a bridge adjacent to railroad tracks. Which one of the following types of insurance coverage would best respond to claims against the railroad arising out of the contractor's work?

A Railroad Protective Liability Coverage Form covers a railroad against claims arising out of a contractor's work on or adjacent to a railroad property and is purchased by the contractor.

Special hazards of the class

A characteristic typical of all occupancies in a given class that can cause or aggravate a loss. An example is the hazard of cooking, common to the restaurant class. i.e - chemicals, dust, and explosives occur only in certain types of businesses

Special hazards of the risk

A condition that can cause a loss but that is not typical of an occupancy. An example is the use of a welding torch in an auto repair shop. physical hazards found in businesses that conduct operations that are not typical of the class to which they belong

Hazard

A condition that increases the frequency or severity of a loss.

Accidents that could lead to claims

A consumer dies because of impurities in a medicine sold by a pharmaceutical firm. The tenants of an apartment building are injured by smoke inhalation, and their personal property is destroyed by a fire that resulted from faulty electrical work completed by a contractor several hours earlier.

Which one of the following is an example of injury or damage arising from an occurrence that would be covered by the products and completed operations liability portion of the Commercial General Liability (CGL) Coverage Form?

A defective gas range manufactured by the insured explodes causing injury. This would be covered because the gas range is a product of the insured.

Gross Sales

A premium base that reflects the gross amount of money charged by the named insured for all goods or products sold or distributed, operations performed, or rentals made. Rates are stated per $1,000 of gross sales. The premium base should include the full sales price even if the insured does not collect it from customers.

Admissions

A premium base that reflects the insured's liability exposure arising from the number of persons, other than employees of the insured, admitted to an insured event or to events conducted on the insured's premises. This loss exposure is the same regardless of ticket price. per 1,000.

Area

A premium base that reflects the insured's liability exposure based on the total number of square feet of floor space at the insured's premises. Area is rarely disputed and frequently used because the extent of some liability loss exposures depends on the size of the premises. per 1,000 square feet of area.

Payroll

A premium base used in general liability insurance that reflects the insured's liability exposure arising from the work of employees. It reflects the degree of the insured's direct control over operations by measuring most of the activities that create potential liability: the work performed by employees. Payroll is also advantageous because it does not require additional record keeping by the insured because payroll records are already kept. Payroll is also the premium base for workers compensation insurance. Information gathering is more efficient for underwriters who write both general liability and workers compensation coverages for an account. Payroll includes: Commissions, bonuses, and piecework rates; Overtime, holiday, and vacation pay; the value of lodging, meals, and merchandise the insured provides to employees. It does not include: Gratuities and severance pay

Which one of the following insureds would be legally required to exercise the highest degree of care for individuals on its premises?

A retail toy store would be required to exercise the highest degree of care because it would attract many children to the premises.

Underwriting Technician

A specialist in policy pricing and issuance preparation who performs the mechanics of pricing for an insurer.

Classification Table

A table that provides the necessary rating and classification information for general liability, fire, crime/fidelity, and package policy classification in the CLM.

Physical hazard

A tangible characteristic of property, persons, or operations that tends to increase the frequency or severity of loss.

Commercial Lines Manual (CLM)

An ISO publication that includes rules and rating procedures for several major lines of commercial insurance.

Personal and Advertising Injury Liability

CGL form defines this to mean any kind of injury (such as loss of reputation, humiliation, economic loss, or even consequential bodily injury) arising out of any of several listed offenses. Examples of the listed offenses are false arrest, wrongful eviction, libel, slander and infringing upon another's copyright in the insured's advertisement. It is now such a common exposure that is is an integral part of the CGL form, but it can be omitted if the insured does not want to buy it. This is Coverage B on the CGL form.

Medical Payments

CGL form includes Coverage C - Medical Payments, which pays medical expenses of others in certain circumstances. Coverage C, Medical Payments does not require the insured to be legally liable and, therefore, is not technically liability insurance. Underwriters do not individually underwrite this loss exposure but do consider the medical payments loss exposure as part of the premises or operations loss exposures.

Which one of the following is one of the five classifications the Commercial Lines Manual (CLM) uses to refine the general liability classification process?

Contracting or servicing is one of the five classifications the CLM uses to refine the general liability classification process.

Which one of the following physical hazards would be considered a special hazard of the class?

Cooking in a restaurant would be considered a special hazard of the class.

Which one of the following is an underwriting consideration when evaluating the extent of an insured's liability exposure to the public?

Differences in exposure between two premises may be the result of location, type of business, and time in business.

All of the following correctly describe underwriting considerations when evaluating the extent of an insured's liability exposure to the public:

Differences in exposure between two premises may be the result of location, type of business, and time in business. In many cases, the hazards inherent in an insured's operations bear little or no relation to the extent to which the public is exposed to them. The underwriter must consider the legal status of persons likely to be on the insured's premises. NOT TRUE: The presence of heavy traffic automatically means that the premises has an excessive exposure.

Each, total cost, units, and total operating expenditures

Each - the number of some commodity that is part of the insured's business Total Cost - A premium base that reflects the insured's liability exposure based on the total cost of the job. per 1,000. Units - A premium base that reflects the insured's liability exposure based on the number of units the insured owns. Total Operating Expenditures - A premium base that reflects the insured's liability exposure based on the insured's total operating expenditures.

What is the principal determinant of the general liability classification for manufacturers and processors?

End use of the insured's product

Premium base

Exposure base - some measure of the extent to which the insured's operations expose the insurer to loss. The unit in which the exposure is measured, such as gross sales or payroll. The final premium is the rate multiplied by the premium base. The premium base allows underwriters to set a price that differentiates between large and small accounts within the same classification. Selection of premium bases - two characteristics - (1)the premium base should measure the level of activity that produces claims. (2) the premium base should be easy for the insured to identify and for the underwriter to verify.

Extent of Public Exposure Variables

Factors - location, type of business, time in business, or a combination of the three. i.e. a retail store, a typical premises subject of insurance - a long established store with a good reputation and a steady business is more likely to attract customers than a new or declining store. A higher level of customer traffic suggests higher premises loss exposures.

When classifying and pricing manufacturing or processing operations, underwriters should follow all of the following guidelines:

For pricing purposes, exclude the value of any transfers of component parts or interim processes within the operations of the same named insured. Base classification on the final product, not on component parts or interim processes. If an application lists more than one named insured, classify each named insured separately.

Types of Premium Bases

Gross Sales Payroll Admissions Area Each, total cost, units, and total operating expenditures The goal of any premium base is to gauge loss exposures that are present. As loss exposures increase, the indexes used to measure the loss exposure should also increase. The premium base is the foundation for distributing loss costs among insureds. The premium base is directly proportional to the account's exposure to loss.

Which one of the following statements regarding gross sales as a rating basis for general liability insurance is true?

Gross sales include revenue earned from operations performed during the policy period.

All of the following regarding gross sales as a rating basis for general liability insurance are true:

Gross sales include the gross amount of money charged by the named insured, including rentals. Gross sales are sometimes a better measure of a store's exposure than the store's physical area. Gross sales include revenue earned from operations performed during the policy period.

Common hazards

Hazards existing in almost every class of business occupancy, usually referring specifically to (1) housekeeping, (2) heating equipment, (3) electrical equipment, and (4) smoking. i.e. slips and falls, uneven stairs, tears in carpets, inadequate lighting, congested aisles, poor housekeeping, and defective heating or electrical equipment.

General Liability Declarations

ISO has developed separate declarations forms for use with each of its general liability coverage forms. Some of the declarations forms also contain spaces for showing additional information relevant to the associated coverage form. - The insurer's and producers names - The named insured's name and mailing address -The policy inception and expiration dates -Condition stating, "in return for the payment...." Consideration clause -The limits of insurance -Description of the named insured's business -Rating and premium auditing information -A list of endorsements attached to the policy

When classifying and pricing manufacturing or processing operations, underwriters should follow all of the following guidelines, EXCEPT:

If a manufacturer sells its own products through its own retail operations, classify and rate only the manufacturing operations.

Which one of the following is correct with respect to the classification of contracting risks?

If a worker performs several duties and separate payroll records are not kept, the highest rate applies.

Which one of the following statements about owners and contractors protective liability coverage is true?

It covers the property owner from damage arising from the contractor's operations.

Fancy Dress Shop is a small specialty clothing boutique for women. Liability claims against Fancy Dress Shop would most likely arise from its

Liability for Fancy Dress Shop would most likely arise from its premises and operations exposure.

Endorsments

Many endorsements are available to tailor the general liability coverage forms to meet the specialized needs of particular insureds, to make the policy comply with particular state laws, or to eliminate exposures that insurers are not willing to insure. These endorsements are available to help underwriters tailor coverage for insureds with specific needs, but each one comes with its own underwriting considerations that should be carefully evaluated before the endorsement is added to the policy.

Limits of Medical Payments Insurance

Medical payments coverage has a much lower limit of insurance than either Coverage A or Coverage B. Its role is to pay small bodily injury claims without having to establish liability, perhaps reducing the likelihood that an accident victim will sue the insured.

James Smith operates a wholesale nursery that sells only to retail nursery and garden shops. In Commercial Lines Manual classification terminology, Mr. Smith is a

Mr. Smith is a distributor.

Not Otherwise Classified (NOC)

Not other wise classified - applies only if no other classification more specifically describes the insured's business.

The five classifications the Commercial Lines Manual (CLM) uses to refine the general liability classification process include all of the following, EXCEPT:

Not-for-profit is not one of the five classes used in general liability classification.

Bodily Injury and Property Damage Liablity

On CGL form, this is Coverage A - Bodily Injury and Property Damage Liability.

Components of a General Liability Coverage Part

One or more general liability declaration forms One or more general liability coverage forms Any applicable endorsements Under ISO procedures, a general liability coverage part can be included in a CPP or issued in a monoline policy that provides general liability coverage only.

XYZ contractor, covered under an unendorsed Commercial General Liability (CGL) Coverage Form, is installing kitchen cabinets in a customer's home. The contractor manufactured the cabinets. While the contractor is fastening a cabinet, it falls and injures the customer. Which one of the following best explains how coverage under the contractor's CGL Coverage Form applies in this case?

Premises and operations liability applies because the contractor was in the process of installing the cabinets.

Premises and operations liability exposure

Premises and operations liability exposure is the possibility that an organization will be held liable because of bodily injury or property damage caused by an accident that either occurs on the organization's premises or arises out of the organization's ongoing (as opposed to completed) operations on or off those premises. It could be caused by an accident arising out of the products manufactured, sold, or distributed by the organization and occurring after the products are no longer on the organizations's premises or int he organization's physical possession or by an accident arising out of the organization's completed work, including defective parts or materials furnished with the work.

The ISO Commercial Lines Manual's definition of the premium base "gross sales" is the gross amount of money charged by the named insured, by the concessionaires of the named insured, or by others trading the insured's name for various specifically named sources of funds collected. Which one of the following is one of those sources of funds?

Rentals Not included are foreign sales, sales tax and freight charges.

The ISO Commercial Lines Manual's definition of the premium base "gross sales" is the gross amount of money charged by the named insured, by the concessionaires of the named insured, or by others trading the insured's name for all of the following:

Rentals made All goods or products sold or distributed Operations performed

The ISO Commercial Lines Manual's definition of the premium base "gross sales" is the gross amount of money charged by the named insured, by the concessionaires of the named insured, or by others trading the insured's name for all of the following, EXCEPT:

Sales Tax

No Payroll Division (NPD)

Several general liability classifications with a payroll premium base have footnotes that state, "This is an NPD classification." NPD, the abbreviation for "no payroll division," indicates that the payroll cannot be divided with another classification. Either that particular classification applies solely, or it does not apply at all. However, insurers can use an NPD classification for division of payroll subject to the two following provisions: -The activity constitutes a separate and distinct enterprise having no connection with the operations covered by any classification specified in the restrictions. -Insurers cannot use an unqualified NPD restriction for division of payroll with any other classification unless the other classification has no connection with the operations covered by any other classification in the policy.

Which of the following represents physical hazards that occur only in certain types of businesses?

Special hazards of the class

Intercompany sales

The exchange or sale of goods between two or more separate legal entities that are named insureds on the same policy.

Premises liability loss exposure

The exposure to liability for bodily injury or property damage due to the ownership, occupancy, or use of the premises.

Operations liability loss exposures

The exposure to liability for bodily injury or property damage resulting from the insured's business activities conducted away from its own premises.

When an independent contractor is performing operations on a property owner's premises, the property owner sometimes requires the contractor to provide a policy that protects the owner against which one of the following?

The property owner sometimes requires the contractor to provide a policy that protects the owner against liability arising from the operations being performed by the contractor.

Extent of public exposure

The public includes customers, representatives of suppliers, anyone else associated with the business, and the general public. Public exposure for a manufacturing operation - a very hazardous manufacturing operation may present minimal exposure to the public for bodily injury or property damage. This is because businesses tend to locate high-hazard operations in areas in which they will expose few people and little property to harm. Zoning laws almost always demand this protection. However, underwriters should not assume that zoning laws ensure this protection. Even when a manufacturing plan is well sited, the neighborhood surrounding it can change.

Gross receipts

The total amount earned by the named insured for shipping or transporting property, whether or not collected, during the policy period. Recognizes only what the insured receives. Returns and allowances, cash discounts, and uncollectable accounts reduce the amount of an insured's receipts.

General Liability Coverage Forms

These major sections are included in the various ISO general liability coverage forms: Coverages Who is an insured Limits of Insurance Conditions Definitions

Upon entering a restaurant, a customer grasped a handrail that broke off, causing the customer to fall and break his wrist. This is an example of which one of the following types of commercial general liability loss?

This is an example of a premises and operations liability loss.

Requirements for Medical Payments Coverage

To be covered, the medical expenses (as defined in the form) must result from bodily injury because of an accident occurring on the insured's premises or arising out of the insured's operations (other than completed operations) anywhere in the coverage territory.

General contractors performing construction work often hire subcontractors to complete a portion of a job. Underwriters often require general contractors to do which one of the following to avoid vicarious liability losses for the acts of subcontractors?

Underwriters often require general contractors to obtain certificates of insurance with adequate limits from each subcontractor.

When classifying and pricing manufacturing or processing operations, underwriters should follow which one of the following guidelines?

Underwriters should for pricing purposes, exclude the value of any transfers of component parts or interim processes within the operations of the same named insured.

Other General Liability Exposures

While ISO general liability coverage forms are available for covering either specific situation or specific loss exposure that are not adequately covered by the CGL form, successful underwriting of these types of loss exposures requires a thorough understanding of the policy provision to properly evaluate the general liability loss exposures and to determine whether the insured's loss exposure is on that is covered under the CGL policy or would be more appropriately covered under a different coverage form. The underwriter should also not ignore possible gaps, omissions, or overlaps in coverage by automatically providing only the coverage requested by the producer. Whenever necessary, underwriters should explain to the producer alternative methods of treating any observed gap, omission or overlap. This elimination of gaps in coverage aids all parties concerned, including the insurer, by avoiding misunderstandings about coverage that might arise after a loss occurs.

premises loss exposure

i.e. - retail store

operations loss exposures (operations in progress)

injuries arising while work is being performed i.e. building contractor

completed operations loss exposures

liability for damage or injuries arising from finished work

General Liability Insurance

the major categories of liability losses covered by general liability insurance are bodily injury and property damage liability and personal and advertising injury liability. Bodily injury and property damage liability can be further categorized as premises and operations and as products and completed operations. General liability policies can also cover medical payments or special loss exposures excluded by the CGL form. A general liability coverage part consists of one or more declarations forms, one of more corresponding coverage forms, and any applicable endorsements. It can be included in a CPP or issued in a monoline policy.