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General liability class codes
Also known as “GL class codes” for short, general liability class codes are numbers that represent a group of small businesses who perform similar work and share similar risk exposures.
Have you ever wondered why an insurance company wants to know what type of work you do when you’re purchasing business insurance? Well, your line of work has a lot to do with the types of risks an insurer would have to cover.
Risk exposure is insurance speak for the types of accidents and liabilities you may encounter over the course of doing business. For example, a graphic design agency has very different risk exposure than a landscaping company. In order to provide the best price for general liability insurance policies, insurers must take these different types of risks into account.
They do that by categorizing businesses with a little thing called general liability class codes.
What are general liability class codes?
General liability class codes, or “GL class codes” for short, are numbers that represent a group of small businesses who perform similar work and, from an insurer’s perspective, share similar risk exposures.
Typically, insurers borrow these codes from a standardized list provided by a rating bureau or other recognized classification body. These bodies, in turn, base their codes on one of a few standard classification systems, including:
- Insurance Services Office (ISO)
- North American Industry Classification System (NAICS)
- Standard Industrial Classifications (SIC)
Each of these systems has different class codes and ways of categorizing business. For example, a barber shop has a ISO CGL class code of 10113, while the SIC code is 7241.
Why your GL class code matters
General liability class codes are not just a random number assigned to your business. Each classification code helps insurers accurately set appropriate premiums, based on the types of accidents and losses a business like yours, in your state, may incur over time.
Here’s why that matters. If an insurance provider sets premiums too low, they may end up in a scenario where they run out of money to pay out claims. It’s great to get cheap rates, but you also want an insurance provider you can rely on for the long haul. If, on the other hand, an insurance provider sets their premiums too high, a business owner would probably choose another provider. Everyone wants to get the most affordable rate for their business insurance, while ensuring a maximum amount of coverage.
While we’d all love to have free liability insurance, we know that’s not possible. That’s why insurers do their best to set reasonable rates—so they can stay competitive. General liability class codes help them do that accurately for a wide number of professions.
Where do general liability class codes (and in turn, premiums) come from?
Typically, insurers start developing the general liability class codes for their state based on one of the three systems we mentioned above. Then, they add in other factors to calculate the premiums for each class of business.
They’ll research the claims submitted by companies in each class on a state, regional, and national level. This data helps them assess how common general liability claims are for business in a particular class and if the frequency or cost varies by location. For example, painters and carpenters in more rural areas in the Midwest may have less potential for property damage (and subsequent claims) than those in more densely-populated cities along the coasts.
Finally, insurers review other elements that can impact a company’s risk exposure, like the size of a team or if they have an office space. With all this data in hand, they adjust the numbers to arrive at the final premium for a particular category of small businesses.
What else are general liability class codes used for?
In addition to estimating the scope of risk and severity of claims associated with a category of businesses, general liability class codes are also used to exclude coverage.
GL class codes define a set of covered activities—and the associated liability—that could be expected for a group of businesses to encounter over time. Typically, coverage is limited to those activities and their associated risk for injury or property damage. That’s how insurers are able to keep premiums reasonable.
However, it also may mean that you are not protected for liability from activities that wouldn’t be expected from a business with your class code. For example, if you have general liability coverage through your handyman insurance, you’re protected from third-party claims of bodily injury or property damage that could occur during your work. Your clients may injure themselves if your toolbelt is left out in the hallway, or one of your workers may accidentally damage an expensive item in the client’s home.
Now, let’s say one of your clients asks you to paint their bedroom, and you say yes to the job because you used to work as a painter. If someone or something gets hurt as part of your painting work, your insurance may not protect you—as painting (98305) has a different class code than handyman (95625).
These uncovered activities may not be covered if they are specifically listed in an exclusion.
General liability vs. workers’ compensation class codes: Not one and the same
When it comes to class codes, general liability insurance isn’t the only one in on the party. Insurance companies who offer workers’ compensation insurance also use class codes to classify businesses by their common risks.
However, the frequency, cost, and types of liabilities that can affect injuries to employees are different than those that affect injuries and damages to third parties. So workers’ comp insurers use a different set of class codes, usually based on those provided by the National Council on Compensation Insurance (NCCI) or by other state workers’ compensation bureaus, to price the premiums for workers’ comp.
- Bottom line: A general liability policy uses GL class codes, while workers’ comp insurance uses workers’ compensation class codes. The class codes are not interchangeable.
What general liability class codes mean for your small business
General liability class codes aren’t just a bunch of numerical mumbo jumbo your insurance provider needs to know; they determine the kind of risk exposure your insurer associates with your business, and will be used to approve or deny coverage when you submit a claim. It’s important that you understand how your business is being categorized.
Beyond coverage, your GL class code also helps set the rate you’re quoted for your insurance, so you want to make sure you’re only paying for the coverage you need.
Lots of small businesses overpay; at Thimble, we set out to change that.
We sell business insurance for over 140 different professions, with options for monthly insurance and short-term coverage that’s as short as one hour. And, you can get your quote in 60 seconds! Just tell us your ZIP code, your job, and how long you need coverage. Then you can review your quote instantly—seriously, it’s that easy. Get a quote today.