270.6-32

CLASSIFYING RISK–SELLING OPERATIONS

(April 2019)

INTRODUCTION

The Insurance Services Office (ISO) has three classifications that apply to pure selling operations. Selling operations do not manufacture or modify anything. They simply sell the goods or products others manufacture or produce.

CLASSIFICATIONS

There are three classifications to consider:

• Class Code 55410: Importers
• Class Code 45993: Manufacturers' Representatives
• Class Code 47367: Sales or Service Organizations

Each of these should be reviewed and compared side-by-side to determine the one that best matches a specific selling operation's actual activities. Selecting the wrong classification can result in pricing errors and/or rejection of an otherwise acceptable risk had it been properly classified.

None of these are Not Otherwise Classified (NOC) classifications which means the can be reviewed in any order. Each has unique characteristics that must be identified and examined to determine the correct classification to use.

CLASS CODE 55410: IMPORTERS

This classification is unique because of its "mix-and-match" characteristics. Its loss cost for both premises/operations and products/completed operations is "a." This means that the insurance company determines the loss cost for each risk individually instead of using a published loss cost. The notes that accompany the classification explain how to determine the appropriate loss cost. This approach is somewhat unusual but entirely logical. The premises/operations loss cost should be based on the wholesaler or distributor classification that most closely matches the types of products the importer handles. The products/completed operations loss cost is based on the manufacturing classification that most closely matches the types of products the importer handles.

This split approach acknowledges the realities of this class. The premises exposure is that of a wholesale/distributor, but the products exposure is much more like a manufacturer. This is because foreign manufacturers often do not respond to products liability claims and leave the importer responsible for any payments.

Example: ABC Auto Parts imports automobile rearview mirrors. The "a" loss cost for the premises/operations rating is based on Class Code 10070: Automobile Parts and Supplies Distributors. However, the products/completed operations "a" loss cost is based on Class Code 51252: Automobile, Bus, or Truck Parts Manufacturing–Not Operating Parts.

The notes make one last point. This class code is not used if the risk operates on a commission basis and never takes title to the product it sells. Manufacturers' Representative class code 45993 is used instead. As a result, in order to be considered an importer it must not only take orders but must also take title to the goods when they enter the country before it sends them to the final customer.

CLASS CODE 45993: MANUFACTURERS' REPRESENTATIVES

Manufacturers' representatives have a special role in distributing a variety of goods. Manufacturers’ representatives have the following unique characteristics:

• Are not employees of any business they sell products for and do not receive any employee benefits from them
• Do not keep any stock on hand except for small quantities of products to use as samples
• May help install products sold
• May train the purchaser to use them properly
• Operate on a commission basis
• May have a sales force. If it does, these employees may be paid salaries and receive employee benefits. The manufacturers’ representative must pay all salaries and employee benefits, not the client represented.

Manufacturers' representatives are independent contractors that sell the products of one or more manufacturers on a commission basis. The premium basis is gross sales, but the definition of gross sales is the commission the rep receives. A manufacturers' representative can have office space and still be classified as a manufacturers' representative as long it does not have a warehouse or storage space. When there is either warehousing or storage, the manufacturer representative must be classified and rated as a wholesaler or distributor. Manufacturers' representatives are similar to independent insurance agents in some ways. They control their sales staff and sell only certain products. Many offer training on the products they sell. Many manufacturers’ representatives have specific product knowledge that they can provide to their customers. Their customers often look to them for guidance on the products to purchase. Similarly, the independent insurance agent's customers look to him or her to guide them in sorting through the various methods to protect their assets.

CLASS CODE 47367: SALES OR SERVICE ORGANIZATIONS

The Sales and Service Organization is the most difficult of the three classifications to understand. Most of its employees must work off premises. Some employees can be on premises, but they should be primarily the people who control the outside employees. These off-site employees fall into one of the following two categories:

• Salespersons or canvassers
• Employees of the insured who work for others. The work is to be clerical, collectors, messengers, draftspersons, auditors, accountants, and models.

Only the first category applies to the selling operation because the second category applies to temporary employment agencies.

Related Article: Classifying Risk–Employment Agencies

MAKING THE CHOICE

Some selling operations may appear to qualify under any or all the classifications described above. According to ISO rules, only the one that best meets the classification description applies. However, when each one could best describe the specific business, it is important to review the different approaches used to develop the premium.

The premium base for Importers is sales. The premium base for Manufacturers' Representative is also sales but not the actual sales. The commission the manufacturer representative receives is used as its sales.

The premium basis for Sales and Service Organizations is payroll. However, according to the notes for Sales and Service Organizations, the only payroll to be considered is the payroll of the employees who are off site. This means that the firm that is strictly a sales organization that uses off-premises salespeople uses only the payroll for those off-site salespersons to calculate the premium. This is at conflict with General Liability Rule 24 that states that the payroll of salesperson who operate off premises and do not deliver product is not considered in a payroll-based classification. The way such a conflict is resolved GL Rule 26. Classifications. Item A. Priority states that classification wording or notes always take precedence or General or Coverage Rules

SUMMARY

Classifying selling operations is not always clear cut. Careful review of the operations and methods are required. Once a classification is selected that the insurance company agrees to, it is important to document the file so that auditors understand the decisions made and so that they only change the classification if information is developed that challenges the original decision.