The importance of proper risk classification

Coverage Q&A: What happens if an insured's business is misclassified by the insurer?

This question reveals the importance of properly classifying a risk based on the insured’s entire operations. (Photo: Shutterstock)

Every claim is different, and some insurance policies can be difficult to interpret for unique situations. FC&S Expert Coverage Interpretation, the recognized authority on insurance coverage interpretation and analysis for the P&C industry, makes it simple to find credible answers to your complicated coverage questions. Analysis brought to you by our FC&S experts. 

Editor’s Note: This week’s question deviates from policy language interpretation to asking how risk should be classified, and what happens if a risk is classified incorrectly.

Question: In our insured’s policy, the insurer labeled their business as a cosmetics and beauty supply store when they should be described as a cosmetics manufacturer. Specifically, the insured manufactures makeup in the U.S. and China using their labels; while they do not own the formulas, it is their product they are producing.

If an insured is rated by a carrier as a different type of business than they are, does that affect product liability or other coverages/?

— Utah Subscriber

Analysis: The accurate classification of risk is fundamental from both an underwriting and rating standpoint. It is such a vital component of the application and underwriting process that the misclassification of risk can subject an agent to E&O liability or even result in having an insurer deny coverage for a claim and/or void the policy.

Answer: To learn the answer to this week’s coverage Q&A, please log into your FC&S Expert Coverage Interpretation account.

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