This question reveals the importance of properly classifying a risk based on the insured's entire operations. (Photo: Shutterstock)
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Editor's Note: This week's question deviates from policy language interpretation to asking how risk should be classified, and what happens if a risk is classified incorrectly.
Question: In our insured's policy, the insurer labeled their business as a cosmetics and beauty supply store when they should be described as a cosmetics manufacturer. Specifically, the insured manufactures makeup in the U.S. and China using their labels; while they do not own the formulas, it is their product they are producing.
If an insured is rated by a carrier as a different type of business than they are, does that affect product liability or other coverages?
— Utah Subscriber
Analysis: The accurate classification of risk is fundamental from both an underwriting and rating standpoint. It is such a vital component of the application and underwriting process that the misclassification of risk can subject an agent to E&O liability or even result in having an insurer deny coverage for a claim and/or void the policy.
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