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CLASSIFYING RISK COMPONENT PARTS Valve manufacturer’s exposures illustrate complexities of classification By Linda D. Ferguson, CPCU Many tragedies are caused by the malfunction of a small part that starts a chain reaction. It may be a valve, a bolt or another seemingly minor part that fails, and then the rest of the product can’t operate appropriately and the entire product fails. If the product fails and an injury occurs, who is responsible? Today’s manufacturing processes involve multiple parts—manufactured by multiple component parts manufacturers—which are finally assembled by the company whose name the product bears. Who is responsible? The answer in most courts is that anyone and everyone who contributed to the failure and the injury is culpable. How should the manufacturing or processing of these component parts be classified for underwriting and rating purposes? Since a valve is a part used in aircraft, automotive and machinery products, we will use it as an example as we explore classifying component parts. The ISO General Liability Rules define exactly how to begin the classifying process. There are general rules that apply to all classifications and then specific rules that are applicable to a specific category of risks. General Liability Rule 27, Manufacturing and Processing Risks - Classification Assignment and Premium Computation Procedures is our starting place. It begins by stating that the classification selected must “best describe” the named insured’s final product. It goes on to state that if the named insured manufactures components that go into its final product, no charge is made for the component. This means, for example, that if an aircraft manufacturer manufactured both the valve and the aircraft, there is no separate premium charge for the valve. However, if the aircraft manufacturer manufactures valves for its planes and for others, a separate charge would be made for the valves for others but not the ones put in the aircraft manufacturer’s own product. The classification for valve manufacturing is 59892 - Valves Mfg. There are no footnotes to explain how to use the code, and this is not a “not elsewhere classified” code, so there appears to be no limitation on using this code. However, this doesn’t seem quite right. Is an aircraft valve the same as a water valve or an automotive engine valve? If a product is a component part of a product, should it be classified based on that final product? Let’s consider a few of the classifications that could be used instead of Valve Manufacturing. 51201 - Aircraft or Aircraft Parts Mfg. could be used for the valves that are manufactured for the aircraft parts industry. There are also no footnotes to restrict the code, and this is not a “not elsewhere classified” code. If a valve is used in an automobile, the following codes could be considered: 51252 - Automobile, Bus, or Truck Parts Mfg. - not operating parts 51253 - Automobile, Bus, or Truck Parts Mfg. - operating parts The operating parts classification has a footnote that lists various parts of an automotive system but then states that it includes component parts. There are no footnotes under the not operating parts class. If a valve is used in machinery, one of the following codes could be considered: 56650 - Machinery or Machinery Parts Mfg. - construction, mining or materials handling type 56651 - Machinery or Machinery Parts Mfg. - farm type 56652 - Machinery or Machinery Parts Mfg. - industrial type 56653 - Machinery or Machinery Parts Mfg. - metalworking 56654 - Machinery or Machinery Parts Mfg. - this is the NOC classification There are no footnotes with any of these classifications. The argument could be made that since Valve Manufacturing has no footnotes, and it is, to the valve manufacturer, a final product, it is the only choice. I’m sure many of our readers will agree. However, please consider this question: What is an aircraft part? If a particular valve is used only in an aircraft, isn’t it an aircraft part and therefore properly classified in the Aircraft and Aircraft Parts Manufacturing class? If we agree that the final product could be called either a valve or an aircraft part, then we can agree that a decision must be made as to which class “best describes” the final product. The footnotes and the rules do not provide any recommendations when two classes are equally suited for a final product. Since we don’t have anything definite from ISO, we need to follow the axiom that premium must follow exposure. What is the actual exposure that is being considered when the particular risk is being priced? Is the exposure the valve malfunction or the aircraft malfunction due to the valve? Ask the question: What happens if the valve malfunctions? If the aircraft stops, veers, shatters or in any way causes injury or damage, the valve could be classified under the aircraft parts classification. However, if the valve malfunction would not be part of any chain reaction that causes the aircraft to malfunction, then the valve manufacturing class could be more appropriate. This same argument and analysis applies to the auto and machinery parts classifications described above and also to other separately classified component parts such as screws, bolts, etc. While many classifications are very precise, there are classes where analysis of the exposure is the only way to establish the appropriate classification. Instead of “follow the money,” the classification detective must “follow the exposure” for accuracy. * |
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