Take a closer look at what it means to classify a business versus an operation
Pinnacol’s underwriters consider many factors when determining our mutual customers’ premiums. Among the most important factors are classification codes the rating bureau, the National Council on Compensation Insurance, assigns to businesses and industries (e.g., painting, retail). NCCI bases these codes on injury rates or historical risks associated with specific industries.
Our agent partners tell us small-business owners often ask why their businesses are classified according to a general business type rather than by their employees’ actual work, which is less risky than what is typical of their business type and thus should result in a lower premium. The following example will help you answer this question.
Let’s look at a small residential construction contractor, which consists of an owner (who has elected to reject workers’ compensation coverage, as allowed) and an administrative assistant. The owner wants the administrative assistant covered and a policy that uses only classification code 8810, “clerical office employees.”
According to NCCI regulations, Pinnacol underwriters must classify the policy — and set the premium — based on the business type and the risks associated with that business. In this case, the correct classifications for this residential builder would be 5645, “Carpentry — Detached One-or Two-Family Dwellings,” and 8810, which is a standard exception. (Standard exceptions are classifications that describe occupations common to many types of business; 8810 is the standard exception for a clerical office.) This policy would have both class codes because the primary hazards of the business are not in the office but on the job site.
When underwriters classify a business, their first step is to establish one basic classification. Then they add any operations defined in the classification scope that need to be rated separately. At that point, they consider these questions:
- Do general inclusions or general exclusions apply? General inclusions are certain operations a business performs that would be eligible for their own classification if the operations were conducted as a separate business. Examples of general inclusions are health centers or medical facilities an employer operates for its employees. General exclusions are certain operations that involve hazards not included in a basic classification. Unlike general inclusions, general exclusions are separately classified unless the basic classification states the operation is specifically included. Examples of general exclusions are new constructions or alterations.
- Can another basic classification apply?
- Do standard exceptions apply?
Getting back to our example of the contractor, even though the owner has no employees other than the administrative assistant, he or she could be a “statutory employer.” In other words, if a general contractor uses a subcontractor that doesn’t have a current workers’ compensation policy, the general contractor is responsible for any injury the subcontractor’s workers incur. (Colorado Workers’ Compensation Act 8-41-401 specifically addresses this issue.)
Any entity (e.g., another contractor, a client) that requests a certificate of workers’ compensation coverage probably is not interested in whether the contractor has workers’ compensation coverage for his or her administrative assistant. That contractor or client simply wants assurance that his or her employees on the job site will be covered. Because Pinnacol certificates do not show any classifications, the other entity would not know what classifications the policy covers.
NCCI business classification codes are designed to describe businesses — and the risks associated with those businesses — as a whole. In the case of the residential contractor, the nature of the business is both clerical and construction-related, and why both classification codes would be on the policy.