Third of a three-part series
CLASSIFYING RISK
One $5,000 loss to residence calls for contractors' work tied to nine different classification codes
By Linda D. Ferguson, CPCU
Third of a three-part series
In the last two columns we illustrated the exposures of various contractors by using as an example the contractors who made repairs to our house following a recent windstorm loss. In the first column (August Rough Notes) we discussed payroll definitions and in the second (September Rough Notes) we discussed the role of the general contractors. In this concluding column, we will discuss the proper classification of the contractor and proper separation of payroll in order to gain a fair and equitable price based on exposure.
The contractors who were needed to repair our house all had at least one thing in common, but there were also a lot of differences. The common point was that they were contractors. As such they didn't sell a product but instead sold a service. They were all prepared to repair the damage that had been done. Any materials they used would be of their own choosing, with very little consultation with us. As their customer, we would trust their judgment and expertise in making those choices. As a customer, we were really paying more for their accumulated knowledge and ability than for the physical cost of materials.
Since we had a hole in the roof, the first contractor we wanted to locate was a roofer. ISO classifies roofers as either residential (98678) or commercial (98677) and provides no footnotes of explanation for either classification. Both codes are based on payroll. If the individual handled both commercial and residential, he would have two choices. Either lump the payroll together and pay based on the highest rated code or keep track of payroll by type of job and use the two codes. While the choice may seem obvious, for some operations keeping the payroll separate would result in higher bookkeeping costs than would be saved in insurance premium.
The contractor we used was a "disaster expert," or at least that was what his advertisement said. He specialized in the emergencies of life and could handle not only the exterior repairs but also the interior. As such, he could qualify for multiple codes. First, he had to do some carpentry work to fix the hole in the roof. If there had been additional carpentry work needed, he had the tools and the knowledge to handle it. There are five carpentry codes provided by ISO, but only Carpentry NOC (not otherwise classified) (91342) would have fit this individual, based on the footnotes provided. Next, he had to check the electrical because water had penetrated the roof and shorted out the overhead light. This could be classified as Electrical Work in Buildings (92478). Then he had the roofing job itself to complete.
Water had hit the dining room walls, but the wallboard was not damaged. If that had happened, he could have repaired the damage and then have put that payroll in class Dry Wall or Wall Board Installation (92338). Once the roof was finished, we did need to have the walls repainted. He could also supply that service and therefore could have classified that payroll as Painting - Interior--Building or Structure (98305).
We had siding put on the house and new windows installed about a year before the accident, so we called that firm to repair the damage to the siding and the windows. The primary classification for that work would be Siding Installation (98967), but the windows would be classified as Door, Window or Assembled Millwork-Installation--Metal (91746). If the siding or the windows had been wooden, as opposed to metal, the Carpentry NOC (91342) code would have been the appropriate classification.
The final part of the reconstruction process was the floor. The dining room had been carpeted, so our first thought was to purchase new carpeting and have it installed. The carpet would be purchased at either a furniture store or a floor covering store, and the store would arrange for installation. The installation would be classified separately from the floor-covering sale. The installation is classified as Floor Covering Installation--Not Ceramic or Tile (94569).
However, we had a second choice. When we removed the carpet, we discovered a beautiful hardwood floor. We chose to have it refinished rather than carpeted. The refinishing code is Carpentry - Interior (91341).
In order to properly classify the contractors who handled a very small situation we have reviewed nine different codes. The ways in which these classifications are used will determine the final premium for the contractor. These contractors were like all of us, doing the best job they could in the work environment they had. The one thing they didn't need to worry about was the insurance they were buying and the price they were paying. That was the job they were paying their insurance agent to handle. Just as the contractor carefully picks the right material and tools for the job, the agent needs to pick the correct classification and payroll to provide the correct premium.
I was pleased with the reconstruction these individuals did. When I watched them, I could tell they were doing the best they could and were trying to please the customer with service and quality. The roof never leaked, the window worked well, the floor was beautiful. Everything they promised was delivered.
As part of the industry that provides the "disaster relief" to these individuals, I hope we respond with the same concern for quality and precision in our line of work as they gave to me in their line of work. The contractor is paying not just for the paper and computer time but is really paying for our knowledge and our ability to choose on his behalf. Taking the time to search a little in the classification manual can make life a little easier for your new client. *
The author
Linda D. Ferguson, CPCU, has 30 years of underwriting experience
with national commercial lines carrieres. She now operates a consulting business, Pleasant
Street Consulting Company, in
Newtonsville, Ohio. She can be reached at ldfcpcu@hotmail.com.