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The Consequences of Misclassifying Risk

From inadequate coverage to unexpected costs and lawsuits, the risks of misclassification are real and can have a lasting impact.
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the consequences of misclassifying risk

As an insurance agent, you understand the importance of providing accurate insurance quotes for your clients. However, misclassifying risks can lead to significant consequences for both you and your clients. From inadequate coverage to unexpected costs and lawsuits, the risks of misclassification are real and can have a lasting impact.

The key to avoiding misclassification starts with a thorough understanding of your clients' businesses and the risks they face. By taking the time to gather detailed information and asking the right questions, you can accurately assess the risks involved and provide an insurance quote that offers comprehensive coverage.

It is also a good idea to review your client's website, social media profile and online reviews. If your client mentions a service online, those services must be considered when determining the appropriate class code and answering underwriting questions.

Additionally, staying up to date with industry trends and regulations will help you navigate the complexities of risk classification and ensure compliance with legal requirements.

Here are five reasons why accurate classification is important—and the impacts of getting it wrong:

1) Claim coverage. By accurately classifying risks, you can ensure your client has insurance coverage that is specifically designed to protect their business needs. If their business is misclassified or does not have adequate coverages based on their operations, they may be forced to pay out of pocket for any liability and damages.

2) Cost impacts. Misclassifying risks can result in your clients overpaying for insurance they do not need; being underinsured or carrying inadequate limits; or even underpaying for insurance— resulting in your client being required to pay additional premium following an audit of payroll and operations. By avoiding misclassification, you can help your clients get the coverage they need and the carrier gets the appropriate premium for the risk characteristics.

3) Reputation. If your client's business is misclassified, any bound policies are potentially not viable and could be canceled by the carrier, putting your client's business at risk. By consistently providing accurate insurance quotes, you build a reputation as a trusted and reliable insurance agent. This reputation will not only attract new clients but also foster long-term relationships with existing ones.

4) Legal risks. Misclassification can lead to legal issues and potential lawsuits. By accurately assessing risks and providing appropriate coverage, you can help your clients avoid legal pitfalls and protect their businesses from costly litigation. Furthermore, misclassifying a client's business and selling a policy that does not cover their unique risks could lead to legal issues and a potential errors & omissions claim for you, the insurance agent.

5) Good standing. By consistently using the incorrect class code when securing quotes for your client, you are at risk of being prohibited from using specific platforms and losing your carrier appointments. Providing correct class codes ensures you remain in good standing with carrier and underwriting partners.

In the fast-paced world of insurance, accuracy and attention to detail are paramount. By avoiding the risks of misclassifying risks, you not only protect your clients but also safeguard your own reputation and business.

Mike Ferber is head of Victor Small Business, the digital managing general agent (MGA) of Victor Insurance Managers LLC, specializing in commercial insurance for small businesses. He has over 25 years of experience in technology, process efficiency, and customer-centric digital solutions.

Monday, July 8, 2024
Commercial Lines