Test Your General Liability Pricing IQ
Here’s a quick quiz for insurance agents/brokers and my underwriting brethren to determine your General Liability Pricing IQ.
1. Which of the following are NOT part of the Loss Cost Multiplier?
b. Allocated Loss Adjustment Expenses
c. Underwriting Profit
d. Treaty Reinsurance cost
e. None of the above
2. Loss Costs represent the historical claim value for claims,
a. Up to $100,000 Occurrence and $200,000 Aggregate
b. Up to $1,000,000 Occurrence and $2,000,000 Aggregate
c. Up to $25,000 Occurrence and $50,000 Aggregate
d. Up to $50,000 Occurrence and $100,000 Aggregate
e. None of the above
3. When writing a manufacturing risk,
a. There should be a separate charge for sub-contracted installation work.
b. Only rate for installation work for sub-contractors who are not adequately insured.
c. Sales from excluded products should be entirely excluded from rating.
d. Foreign sales should be excluded from rating.
e. None of the above
4. When covering a hotel operator, the following should be separately rated for.
a. Rental income for kayaks, paddle boards, and canoes
b. Catering for meetings.
c. Sales for gift stores operated by the hotel.
d. Receipts for meeting room rental.
e. None of the above.
5. When rating for a restaurant while covering liquor liability you should
a. Only use non-alcohol sales to rate the general liability portion because alcohol sales
are addressed by rating for liquor liability.
b. Not rate for offsite catering operations.
c. Use all restaurant sales, including alcohol sales, to rate for the general liability
d. Rate separately for a dance floor and any cover charges.
e. None of the above
Question # 1
The answer is b, allocated loss adjustment expenses. The loss cost multiplier is a factor use to convert loss costs into rate by applying a factor representative of the carrier’s expenses such as commission, underwriting profit, and treaty reinsurance. They also represent carrier expenses that cannot be tied to a specific claim. For example, the cost of a claims adjuster’s salary is spread across all the claims they would handle. Hence, their salary would fall within the category of unallocated loss adjustment expenses. An example of allocated loss adjustment expense would be fees paid to attorneys to defend the insured.
The correct answer is a, $100,000/$200,000. Any claims values over $100,000 on a single claim or over $200,000 on an annual basis are considered excess claims and do not go into the actuarial rate calculations. Claims for those amounts occur at an unpredictable level and frequency. Therefore, ISO caps the claim values. Claims over that level are addressed on a group basis utilizing an increased limits factor that is applied over a group of individual classifications where frequency and severity is collectively more predictable.
At one point in time the basic limits level was $25,000 occurrence and $50,000 aggregate. But with the value of claims increasing over time it has grown over time. So has the basic limits.
The correct answer is d, none of the above. ISO general liability rating rule #27 specifies how to treat manufacturing risks. Loss costs are based on sales (with a few exceptions). For the most part the products and completed operations loss cost anticipates the product being in position where it will be used. Think about it. Sub-contractor costs and payroll are a subset of sales and therefore already anticipates the installation costs. From a premises and operations perspective, other parties’ insurance generally would step in front of the manufacturer’s coverage as they are generally held responsible for what happens on the jobsite. Either way, ISO rules state that installation costs should NOT be charged separately for. However, there are a few classes with exceptions to the rule. Therefore, it is advisable for both the underwriter and agent to revie the Commercial Lines Manual to make sure they are rating appropriately.
While you would exclude the sales of excluded product from rating Product/Completed Operations Coverage, the Premises and Operations Coverage still applies as it is difficult or impossible to carve out the premises exposure for a specific product excluded. Hence, the sales for an excluded product will be included to rate for the Premises and Operations.
Coverage for products is extended to worldwide if suit is brought within the “covered territory.” Loss Costs anticipate exportation of products.
The correct answer is e, none of the above. Hotels and motels have specific inclusions and exclusions in the rating process. All those operations are specifically included within the hotel classifications. It is important to always review the classification in the Commercial Lines Manual to make sure to understand what operations will need to be separately.
The answer is c, use all restaurant sales, including alcohol sales, to rate for the general liability portion.
I have often been in discussions with folks who claim that charging for both food and liquor receipts while also charging for liquor liability is double dipping. It is not. General liability and Liquor Liability are 2 separate and distinct coverages. Liquor Liability only covers liability placed on the restaurant through application of dram shop laws. General liability covers everything else. The establishment be held liable to patrons drinking outside of liquor liability claims.
In addition, off-site catering has a specific class and requires to be separately classified and rated. It is important to note that “takeout” sales is considered as part of the restaurant’s regular operations.
If you scored 4 out of 5, you probably have a good knowledge level about general liability pricing. However, it is always smart to become a close friend with the Commercial Lines Manual and use it frequently.
If you scored below that, it is time for you to go back to school and learn some of the basics. That is if you want to price accounts correctly or make sure your clients are being treated fairly.
There are some good resources to learn or re-learn the basics of general liability. One I would recommend, is Kaplan University. They have an excellent self-learning course, which I believe is qualified for continuing education credits for many states.