PAAS lessons in workers’ compensation and general liability for insurersBy Gary Higgins | January 14, 2019
This past October, ISO’s Premium Audit Advisory Service (PAAS®) hosted its 2018 PAAS Forum, which featured presentations on key workers’ compensation and general liability issues for the premium audit audience. Those sessions contained information that insurers will find useful in managing emerging risks and in defining general liability classifications better.
The emerging general liability risk of legalized cannabis
The use of marijuana for medical and recreational purposes is constantly in the news in the United States. As this article is being written, approximately 30 states have already legalized medical marijuana, with recreational being legal in nine of those states (Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon, Vermont, Washington) and the District of Columbia. With other state governments considering some form of legalization, that number is sure to rise in the future.
As an emerging issue for insurers, one of the obstacles is that there’s currently no general liability classification that specifically describes marijuana—yet, business classification is a key data point in determining coverage. As the marijuana industry becomes a larger part of insurers’ portfolios, assigning the right classification will be vital in maintaining a profitable book of business.
Because ISO hasn’t developed a classification for marijuana yet, PAAS has current recommendations for how insurers should proceed. Essentially, you need to consider three categories for cannabis-based operations: growing, manufacturing, and retailing.
This is the easiest of the three categories to determine because risks only in growing operations can be covered under ISO’s farm program. Additional security considerations may be necessary, and the size of the operation might factor into underwriting, but growing marijuana falls under farming operations.
Manufacturing operations should be defined and assigned to the proper classification based on the final manufactured products:
- Field crop to final product (in this case, cigarettes or dried, loose cannabis):
- Cigarettes: “Tobacco Products Mfg. – Cigars or Cigarettes,” code 59773
- Loose cannabis: “Tobacco Products Mfg. – Other – NOC,” code 59774
- Field crop to an ingredient in other final products (for example, brownies, candy, etc.):
- Brownies and other bakery-type products: “Bakeries,” code 10100
- Candies and similar products: “Candy or Confectionery Stores,” code 10352
- Servicing operations
- Cleaning, drying, and/or storing cannabis for others: “Tobacco Rehandling or Warehousing,” code 99760
Insurers should choose the classification that best describes the risk. For example:
- Retail stores that specialize in selling marijuana and related products for smoking would be classified under “Tobacco Products Stores,” code 18708.
- If the marijuana is dispensed by a drugstore or pharmacy along with other prescription drugs, classify under “Drugstores – …,” code 12374 or 12375.
- For wholesale mercantile operations selling marijuana to third-party retailers and wholesalers, classify as “Tobacco Products Distributors,” code 18707.
The unique workers’ compensation challenges of PEO risks
Professional employer organizations (PEOs) present an unusual risk for insurers because such employees may work at your insured’s company but be employed by someone else. Through a PEO, an employer can outsource employee management tasks, such as employee benefits, payroll, workers’ compensation, recruiting, risk and safety management, training, and employee development.
Employees obtained through a PEO differ from direct employees (workers that the customer company hires and withholds payroll taxes for) and temporary employees (workers used on a short-term basis to fill a position for a finite period). PEO employees are leased under contract and used on a permanent basis to augment a company’s regular workforce. In this relationship, the PEO hires the employees and is their employer of record, a practice known as co-employment.
When covering a customer, an insurer needs to ascertain, among other things, the company’s number of employees and their job functions—which often determines exposure to risks. This business firmographic data is an important consideration when underwriting or rating a policy. Unfortunately, as the employer/employee relationship develops with the leased employee, determining the real employer can become more difficult because the traditional employee relationship may grow convoluted due to specific labor needs, job market changes, and business needs.
An employer or their insurer is generally not responsible to provide insurance coverage any on-site worker who is not an employee of that employer or eligible for benefits. The PEO would typically cover that worker under the PEO’s workers’ compensation insurance plan. Insurers need to understand the role of PEOs and the dynamics of those employer-employee relationships.
Just the FAQs: Workers’ compensation and general liability classifications
Determining the proper classification for a risk is a key factor in developing the correct premium for general liability, workers’ compensation, and many other lines of business. However, sometimes the obvious choice for classification might be wrong. That’s one reason PAAS provides a classification consultation service to subscribers. The “Just the FAQs” section of PAASbase™ is a library of technical questions that can help insurers drill down and examine a risk’s operations to make sure it’s classified properly. Below is a simple example.
Question: What is the most appropriate general liability classification for a risk that is primarily in the business of growing sod but also installs a small portion upon request by a customer?
The figure below provides three classification choices. At first glance, any or all might be appropriate.
However, when you examine each classification in more detail, you can eliminate two classifications, and the right one becomes more obvious, as shown in the figure below:
When looking at the risk’s operations, code 15699 is the best classification to describe that business.
Although each department within an insurer has its role to play, the best results come from sharing information. Underwriters and rating professionals need the most accurate data, analytics, and procedures possible to determine what risks to cover, how to price them, and how to maintain profitable portfolios. Premium auditors have plenty of solid information to impart to the greater insurance audience, and Verisk works with an insurer to bring those insights into focus.
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