Used in Determining Premium

Summary: The Insurance Services Office (ISO) uses certain criteria upon which premium for a liability risk exposure, or hazard, is based. The basis for a premium varies depending on the classification of the risk; for example, the premium basis for a restaurant differs from the basis for a hotel, and they both differ from the premium basis for a manufacturing plant.

This article offers a review of the liability bases of premium. It is not a how-to-rate procedural guide, but it does define the various bases of premium and gives examples so that one can begin to understand the rating process.

Topics covered:

Introduction
Admissions
Area
Each
Gross sales
Payroll
Total cost
Total operating expenditures
Units

Introduction

ISO has a classification table in its commercial lines manual (CLM) that describes the many businesses that exist, such as accounting services or feed manufacturing or condominiums. For these businesses to have liability insurance that applies to their unique risk exposures, a premium charge has to be developed by the insurer. In order to arrive at the premium, the insurer needs some basis upon which to build that premium. ISO offers the following bases: admissions, area, each, gross sales, payroll, total cost, total operating expenditures, and units. Of course, a business may have more than one basis of premium depending on the varied operations of the company, and that is information that needs to be communicated to the insurer in order for a proper overall premium to be set.

Admissions

Admissions means the total number of persons admitted to an insured event, or to events conducted on the premises; this is so regardless of whether the admission is due to paid admission, complimentary tickets, or passes. The rates of the insurer apply per 1,000 admissions. An example of an admissions basis of premium is a theater, whether it be a regular sit-down theater or a drive-in theater.

Area

This means the total number of square feet of floor space at the insured premises, with the rates applying per 1,000 square feet of area. The total area is computed by multiplying the product of the horizontal dimensions of the outside of the outer building walls by the number of floors, including the basement. For example, the measurement of a building is 30 feet by 50 feet for a product of 1500 square feet; the building has three floors plus a basement. The total area for the premium basis is 6000 square feet.

The following areas are not included in the computation: courts and mezzanine type of floor openings; and portions of basements or floors where 50 percent or more of the area is used for storage, building maintenance, dwelling by maintenance employees, heating units, power plants, or air conditioning equipment. So, using the example in the previous paragraph, if the basement of that building is used entirely by the heating units and storage for building maintenance, the total area premium basis would be 4500 square feet.

Some examples that use area for a premium basis are: libraries, law offices, and shopping centers. Building or premises classifications on the classification table are generally rated on an area basis (although a units basis can also be used in some circumstances).

Each

This basis of premium involves units of exposure, and the quantity comprising each unit of exposure is indicated in the footnotes of the classification table. As an example of this basis, an adult day care center is rated on a per person basis. Another example is airport control towers (not operated exclusively by the Federal Aviation Administration) which are rated on an each tower basis. A final example is the classification of streets, roads, highways, or bridges (existence and maintenance hazard only) which has as the basis of premium each mile.

Gross Sales

This basis is defined as the gross amount charged by the named insured for: all goods or products, sold or distributed; operations performed during the policy period; rentals; and dues or fees. Items such as bad debts and freight allowance to customers and trade or cash discounts are included in gross sales. Sales or excise taxes, credits for repossessed merchandise, finance charges, and royalty income from patent rights or copyrights that are not product sales are examples of items not included in gross sales. The rates apply per $1,000 of gross sales.

The examples of businesses that have gross sales as the basis of premium are mostly manufacturing and processing risks, such as adhesive tape manufacturing, automobile manufacturing, concrete products manufacturing, and metal goods manufacturing.

Payroll

Payroll is simply remuneration or pay. It includes, among other types of pay, the following: commissions; bonuses; extra pay for overtime; pay for holidays, vacations, or sick time; the value of lodging received by employees; the payroll of executive officers of a corporation; the payroll of leased workers furnished by a labor leasing firm; and fees paid to employment agencies for temporary personnel that are provided to the insured.

Some items that are not included in the definition of payroll are: tips received by employees; dismissal or severance pay; the payroll of salespersons who work principally away from the insured's premises; and the payroll of drivers and pilots if their principal duties are to work on or in connection with their vehicles. The rates apply per $1,000 of payroll.

Lawn care services have a payroll premium base. Paperhanging is on a payroll basis. Roofing is on a payroll basis. And, stockyards are also on a payroll basis of premium. Contracting and servicing risks are the main type of businesses that are rated on a payroll basis.

Total Cost

This is the total cost of all work let or sublet in connection with each specific project. It includes the cost of all labor, materials and equipment furnished or used, and all fees, bonuses, or commissions made, paid, or due. The rates apply per $1,000 of total cost. Subcontractors are the main group for this type of premium basis.

Total Operating Expenditures

This basis of premium is simply total expenditures, including grants, entitlements, and shared revenue. Included in this basis are some capital improvements, expenditures for independent contractors operations when the contractor does not carry adequate insurance, and any federal or state funds for the sole purpose of training employees. The rates apply per $1,000 of total operating expenditures. Governmental subdivisions—not state or federal—are the main users of this basis.

Units

This describes a single room or group of rooms intended for occupancy as separate living quarters by a family, by a group of unrelated persons living together, or by a person living alone. Small apartment buildings and time-sharing hotels are the main risks for this basis, but housing projects are also eligible for unit basis rating.