This article describes general liability policies, the audit process, audit tips and what should be included in classification "91583 - Contractors - Subcontracted Work - in connection with building construction, reconstruction, repair or erection - 1 & 2 family dwellings". ~ 5 minute read.
Commercial General Liability Policies are essential for all commercial businesses.
A Commercial General Liability (CGL) policy protects your business from damages caused by bodily injury or property damage for which your business is found to be legally liable.
Policy premiums are based on estimated worker classifications and ratable exposures (payroll, sales, area, units depending on the classification) at the inception of the policy period. The audit determines actual costs after the expiration of the policy.
What is required at the time of your commercial general liability audit?
After the expiration of your policy, the insurance carrier audit department will reach out to the named insured to schedule an audit of actual exposures during the policy period. The auditor will request:
- List of employees and description of duties
- General Ledger
- Payroll Journal
- Cash Disbursements, 1099s
- Tax Returns: Quarterly State and Federal
- Certificates of Insurance (COIs) for Subcontractors
Compliance with policy audits is mandatory. If an insured does not comply or respond to the audit request, the insurance carrier can issue an estimated audit which may inflate estimated exposures by 125% to 300%.
As an insured it is your responsibility to schedule the audit (once the auditor has contacted you) and to provide all of the requested documentation.
A look at Classification 91583 – Contractors – subcontracted work – in connection with building construction, reconstruction, repair or erection – 1 & 2 family dwellings.
An important classification that should be included on all residential General Contractors’ (GC) commercial general liability policies, is class code 91583. The premium charge associated with this classification on the CGL is meant to pick up the exposure for the vicarious liability the GC assumes when hiring adequately insured subcontractors.
The rating basis for class code 91583 is total cost – labor and materials, supplied to all adequately insured subcontractors, in construction, reconstruction, erection or repair of one and two-family dwellings. Please note, material costs are included when paid to adequately insured subcontractors.
There is an exception to this rule. If the GC’s employees are installing the material being delivered to the job site, the material costs can be excluded. For example, if lumber was purchased for framing the house by the General Contractor at Ring’s End (material dealer/supplier) and delivered to the job site for the GC’s carpentry crew (direct payroll) to frame the house, the material costs can be excluded.
However, direct payroll associated with these employees (carpentry crew) doing the installation will be placed in the applicable carpentry classification 91340, which carries a much high rate (roughly 3 to 4x more).
Another exception is finished products delivered to the job site for installation, such as appliances. These can be excluded in the calculation of subcontractor cost (91583) because it is a separate, stand-alone finished product that is being installed/put to its intended use.
Uninsured or Inadequately Insured Subcontractors
At audit, if certificates of insurance are not on file or subcontractors are not adequately insured (subcontractor carrying limits of at least equal to GC), then the applicable classification and ratable exposure will be added to the commercial general liability policy. Example – The General Contractor hires an uninsured (no CGL) electrician and therefore no certificate of insurance was obtained. At the time of the audit, the electrical classification will be added to the CGL and the exposure (contractor invoice for labor and materials) associated with the electrical work assigned as the rating basis. Please note – the same holds true for the GC’s Workers Compensation policy (class code and ratable exposure will be added).
Remember, material costs paid to uninsured/inadequately insured subcontractors can be excluded up to 50%, if labor versus material costs are clearly broken out on the subcontractor invoice.
Certificates of Insurance
Certificates of Insurance showing evidence of general liability coverage should be obtained for all subcontractors prior to starting work. If Certificates of insurance are not on file at the time of the audit, the applicable classification and exposure will be added.
Audits tend to go “sideways” when business owners hand off this critical task to unqualified individuals within their organization.
Audit Recommendations
- Make sure a qualified individual within your company is tasked with handling the audit. Qualified individuals understand your operations, individual employee duties, have a relationship with your insurance agent, and have access to necessary audit documentation. They are also not afraid to engage the business owner (or other qualified people) for additional information throughout the audit process.
- Don’t allow subcontractors to start work prior to providing their certificate of insurance showing both General Liability and Workers Compensation coverage for the state the job is located in.
- Separate and track job site material cost (used/installed in construction). Break down each building material dealer invoice within your accounting system to categorize all material costs used in the construction of your projects and supplied to your subcontractors (insured & uninsured). The more organized you are throughout the year, the easier the audit will go. The more accurate your records are, the easier it will be for the auditor to decipher what can and cannot be excluded. If the information is not transparent, the auditor will most likely err on the side of “including” resulting in an additional charge.
- Do you have direct payroll? What materials are your employees installing? Separate material costs used in all construction projects that your employees use/install. Don’t just hand over a material dealer/lumber yard invoices and think you can exclude all material costs.
- Ensure your subcontractors are carrying insurance limits at a minimum equal to your own. Specific required insurance limits and appropriate endorsements should be included within your written subcontractor agreement.
- At policy renewal, review your operations in detail to ensure all appropriate class codes are on your policy and that estimates are realistic for the upcoming term. Check policy exposures mid-term to determine if estimates should be updated.
- Create a relationship with the insurance carrier auditor. The friendlier your organization is with the auditor and forthcoming with information, the smoother the audit will go. Many carriers will assign the same auditor for consistency purposes. This means you could see the same person year after year.
Non-compliant audits will be reviewed at policy renewal and not looked upon favorably by the underwriter. This can be used as a basis for non-renewing your account.
Reviewing your business insurance policy classifications, coverages and scope of operations are essential each year. Contact Tooher-Ferraris to schedule a review @ 203-834-5900 and to provide guidance for your business.
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Written by Eric P. Ferraris, CIC, CRM, CLTC, Principal at Tooher-Ferraris Insurance Group, a Trusted Choice, family-owned/operated property & casualty independent insurance agency in business since 1932. Tooher-Ferraris differentiates itself by its process called Risk Synergy, which coordinates underwriting, loss control, audit and claims to customize insurance programs to meet your business’ specific needs. We would love to hear from you. Phone: 203-834-5900 | email: [email protected] | www.toofer.com