CLASSIFYING RISK
By Linda D. Ferguson, CPCU
Classifying salespeople requires a variety of considerations
There are three ISO classifications that can be used for pure selling operations--that is, operations that ... sell the product that someone else has produced.
"Let the buyer beware" must have been coined around the same time the occupation
of"salesperson" came onto the scene. We have all experienced the joys of dealing with a competent sales representative who provides services beyond what is needed to sell an excellent product. We have also endured the pain of having bought items that have not met the promises made about them.
There are three ISO classifications that can be used for pure selling operations--that is, operations that do not manufacture or modify anything but merely sell the product that someone else has produced. The three classes are:
* Importers--Code 55410
* Manufacturers' Representatives--Code 45993
* Sales and Service Organizations--Code 47367
It is important to view them side by side to see which one matches the actual exposure presented. The wrong decision could result not only in a pricing disaster, but also in rejection of a risk that might have been acceptable to an underwriter under another classification.
None of these classes are Not Otherwise Classified classes, so they do not have to be considered in any particular order. Each has unique aspects that need to be explored in order to determine the most relevant classification to use.
The Importers classification is distinctive in that it is a mix and match code. The rate for the code 55410 is "a." However, the footnote provides guidance on what loss cost should actually be used. This is very unusual but logical for this classification. The premises operations loss cost is to be based on the appropriate wholesaler or distributor code. This recognizes the fact that importers are really a special type of wholesaler and that rather than trying to guess, one should use the wholesaler or distributor that fits. The products and completed operations loss cost is based on the manufacturer's loss cost for the actual imported product. This recognizes that the importer will be treated as the manufacturer for any product brought into the country with little recourse back to the actual manufacturer.
An example of this might be an importer of automobile rearview mirrors. The "a" loss cost for the premises operations is based on 10070 Automobile Parts and Supplies Distributors, but the products and completed operations "a" loss cost is based on 51252 Automobile, Bus or Truck Parts Mfg.--not operating parts.
One last point is made in the footnotes: If the risk operates on a commission basis and never takes title to the product sold, do not use this code. Instead use the Manufacturers' Representative code--45993 instead. Therefore an importer not only must take orders but must also take title of the goods when they enter the country before sending them to the final customer.
What exactly then is a manufacturers' repre-sentative? He or she plays a special role in the distribution process of various types of goods. This person:
1. Is not an employee of any firm for whom he or she sells a product and as such receives no employee benefits from any such firm
2. Keeps no stock on hand except for small amounts of product that can be used as samples
3. May help with the installation of any product sold
4. May train people who buy the product in how to use the product
5. Operates solely on a commission basis
6. May have a sales force and may pay that sales force on a salary basis as well as provide employee benefits to that sales force. But the salary and employee benefits must come from the manufacturers' representative and not from any client whose product he sells
A manufacturers' representative who meets all of the above but who has warehouse facilities is not classified as Manufacturers' Representative, and another class must be found. It is important to note that a manufacturers' representative can have large office space and still be considered in this classification; the individual just cannot have storage and warehouse space.
Manufacturers' representatives resemble the independent insurance agent in many ways. They control their own sales staff and decide what products to sell. Many manufacturers' representatives also offer more than just a product--they offer training and knowledge to their customer. In many ways the person who buys from them looks to them for guidance on what company's product to buy instead of looking to the manufacturer, just as independent agents' customers look to them to provide help in sorting through the various ways of protecting assets.
The Sales and Service Organization is the most difficult of the three classifications to understand. The majority of its employees must work off premises. Some employees can be on premises but those should be primarily the people who are controlling the outside employees. These off-site employees can be doing two things:
1. They can be salespersons or canvassers.
2. They can be employees of the insured who work for others. The work is to be clerical, collectors, messengers, draftpersons, auditors, accountants and models.
This two-part classification does not explain what the salespersons or canvassers are to be doing. It doesn't state that the employees must be doing both 1 and 2. This means that a firm that has salespersons and canvassers but no employees who work for others can use this classification.
Therefore, if a manufacturers' representative does not meet all of the criteria established for that classification but the individual is not an employee of a manufacturer, he or she could fall into the Sales and Service Organization category. If you read over the classification carefully, even an Importer might fit in.
However, before using the Sales and Service Organization classification, it is important to be aware of the premium basis differences. The Importers and Manufacturers' Representative class uses gross receipts as the premium basis but the Sales and Service Organization uses payroll. It is here that everything becomes very, very murky. According to the Sales and Service Organization code, the only payroll to be considered is the payroll of the employees who are off site. This would mean that if the firm is strictly a sales organization that uses off-premises salespeople, then only the payroll for those off-site salespersons is to be used for the premium computation. This is logical until General Liability Rule 24 is consulted. This rule states that under a payroll classification, the payroll of all salespersons who operate off premises and do not deliver product is not to be added into the payroll. This means that there would be no payroll to be used in rating this classification that is based on payroll.
There are no clean answers this month but only a caution--let the agent beware. *
The author
Linda D. Ferguson, CPCU, has 30 years of underwriting experience with national commercial lines carriers. She is vice president of Technical and Educational Products at The Rough Notes Company, Inc.