Chapter 5 | Mercantile Risks

Educational Objectives
Upon completion of this section, you should be able to:

  1. Identify the best classification based on type of products sold
  2. Distinguish between a dealer and a distributor
  3. Identify the special classification inclusions


Over the years it was very unlikely to run across an audit on a mercantile risk since the basis of premium for Premises/Operations was area. However, with the introduction of the 1986 commercial general liability program, the exposure base for Premises/Operations has been converted from area to gross sales.

During this part of the program, we will review the rules regarding classification assignment, basis of premium and rating as it applies to mercantile risks.


The rules regarding the auditing of mercantile risks can be found in the CGL manual under Rule 29. This rule provides procedures for classifying and rating mercantile risks.

There are two rules to be followed to properly classify a mercantile risk:

  1. Choose the classification which best describes the risk.
  2. Combined dealer and distributor operations must be classified and rated under the higher rated classification unless separate records are available.

Choosing the Best Description
Each type of risk is identified by a distinctive first digit in the code number. For mercantile risks, the class codes range from 10000 to 19999. Once you have chosen the classification which best describes the risk, it will be easy enough to identify in the classification table that this in fact is a classification that is applicable to a mercantile risk: The first digit of the classification code number will be "1".


Bicycle Store Code 10150
Florist Code 12841
Grocery Store Code 13673

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Combined Dealer and Distributor
When a risk is a combined dealer and distributor it is assigned to the higher-rated classification when separate records are not kept. A dealer and distributor are defined in the CLM as:

  • Dealer (or store) is a merchant or a mercantile establishment which sells products directly to the ultimate consumer and who is not a distributor. (Retail sales)
  • Distributor is a merchant or middleman, who sells products mainly for resale or for business use and who sells chiefly to dealers or stores, other merchants, industrial, institutional and commercial users. (Wholesale sales).

The assignment of both a dealer and distributor code to a risk requires that the insureds records clearly show a separation in the sales between the two operations. An estimate or a percentage allocation should not be accepted.

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In addition to the general classification inclusions and exclusions discussed earlier, the following special classification inclusion applies to mercantile risks and should not be separately rated:

Installation, servicing or repair of merchandise sold or distributed by the risk.

When a mercantile risk is involved with installing, servicing or repairing the goods they sold, a separate classification should not be used. This is an exception to the multiple enterprise principle.

A carpet store that installs the rugs and carpets they sell would be classified as:

Floor Covering Stores - Code 12805

A separate classification for the installation of the carpets should not be added, even though such a classification exists.


The basis of premium for mercantile risk is Gross Sales by location and classification. The definition of gross sales, as well as what should be included and what should be excluded was covered earlier as we reviewed Rule 24.


The rates applicable to the territory for each location of the insured's operations should be used.

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