Emerging Business Insights
Control Costs With Accurate Exposure Bases and Classifications
MAY 6, 2025
Business owners become frustrated when they realize they’ve been overcharged for their general liability coverage — especially when they learn that mistakes related to reported exposures and classifications could have been avoided.
General liability insurance premiums are primarily determined by the company’s exposure base and classification codes.
How the Exposure Base Can Affect Premium Costs
A company’s exposure base can be measured by area, gross sales, payroll, subcontractor costs, and other types of units. Payroll or sales can fluctuate, and brokers may not pay attention to the exclusions or limitations that apply to certain exposure bases, such as a cap on the payroll of executive officers or the deduction of payroll beyond the normal hourly wage for overtime work.
Understanding which exclusions and limitations may apply to an exposure base is critical to ensure that your premiums are correct. In many cases, when a business has paid unnecessary extra premium due to mistakes, it’s possible to obtain premium refunds retroactive up to three years.
A company with employees who often work overtime was unaware of a rule allowing the company to exclude the extra pay (above normal hourly wages) from their general liability exposure estimates. Since it paid time-and-a-half, its reported payroll exposure was higher than necessary.
USI Insurance Services reviewed the company’s payroll data, final audit, and the general liability policy, and found the company was overcharged because of this error. We shared our findings with the insurance carrier, and it agreed to adjust the premium, resulting in an 8% cost savings.
A commercial greenhouse distributor faced a significant increase in its general liability insurance premiums. When USI looked into the issue, we discovered that as the company grew, it shifted from performing installation work in-house to subcontracting it out. However, because the distributor wasn’t listed as an additional insured on its subcontractors’ insurance policies, the insurance company classified all installation work as performed directly by the distributor’s employees — increasing the premium.
USI verified that the subcontractors carried their own general liability coverage, and then coached the distributor to require additional insured status on subcontractor policies. USI then worked with the insurance underwriter to reassign the installation exposure as subcontracted work, reducing the distributor’s general liability premium by 18%.
When Operations Evolve, Exposures Change
Classification codes are tied to a business’s operations, and each classification carries its own rate. While some businesses may be rated on a single classification, others require multiple classifications to properly represent their operations.
When insurance companies apply classifications based only on broad titles instead of more precise definitions, businesses will overpay for coverage if the assigned classification has a higher rate than other more appropriate classifications.
This issue becomes even more challenging as companies grow and their operations evolve. While their business risks and activities may shift, their class codes aren’t updated to reflect those changes, rolling over from one year to the next. For this reason, USI conducts careful classification reviews with our clients to validate that their general liability exposures are represented correctly, providing them greater control over their premiums and eliminating potential uncovered losses due to misclassification.
After reviewing a metal erector contractor’s operations, we discovered the company was performing both structural and nonstructural work, yet all payroll was being assigned to the higher-rated structural work. By adding the nonstructural classification and reallocating the payroll between the two, the company was able to reduce its premium by 19%.
What If the Error Is in Your Favor?
In some cases, business owners may think they are benefiting from a misclassification if their business has been assigned a lower-rated classification in error. However, most policies are auditable, which means that eventually the insurance company will discover the error. When this occurs, the insurance company has the right to charge additional premium based on the correct classification and exposure base reported by the audit. This can create financial pressure, as additional audit premiums must be paid promptly. In many U.S. states, the insurance company can even look back three years to recover owed premium.
Bottom line: Make sure that exposures and classifications are represented accurately, so the insurance company can determine a fair premium charge at the inception of the policy term and there are no surprises at audit.
How USI Can Help
Companies work with USI to:
- Review the general liability policy to uncover any classification or exposures discrepancies or mistakes
- Amend classifications and exposures accordingly
- Explore backdating changes to recover premiums from prior years, if applicable
In addition to the exposures discussed in this article, USI’s analysis of general liability insurance programs can identify other opportunities to reduce uninsured exposures and create premium savings. To learn more about the risk management services available through USI, email select.business@usi.com.
SUBSCRIBE
Get USI insights delivered to your inbox monthly.
