General Liability Audits- Premium Basis

Unlike workers compensation audits, general liability audits can be based on different premium basis. Below are the various premium basis for general liability audits and how type of risk are based.

Basis of Premium

ADMISSIONS

AREA

EACH

GROSS SALES

PAYROLL

TOTAL COST

UNITS

TYPE OF RISKS

The General Liability classifications are “5 digit” numbers and the first digit indicates the “Business Group/Type of Risk” and the applicable Basis of Premium. The major business groups with the corresponding classification number ranges and basis of premium is listed below. (see PAAS for more information on general liability class codes and ratings.

MERCANTILE 10000 – 19999 Gross Sales

MISCELLANEOUS 40000 – 49999 Various (i.e. each, admissions)

MANUFACTURING/PROCESSING 50000 – 59999 Gross Sales

BUILDING/PREMISES 60000 – 69999 Units and Area

CONTRACTING/SERVICING 90000 – 99999 Payroll

CONTRACTORS-SUBBED WORK 91581 – 91589 Total Cost

ADMISSIONS

This premium base is used primarily for theaters, shows and sporting event classifications. It is meant to measure "the total number of persons, other than working employees of the named insured, admitted to the event or events. This basis of premium will include all event attendees whether on paid admissions, tickets, complimentary tickets or passes." It should be remembered that the admissions figure should include all persons (other than working employees) admitted. The price of the ticket is not relevant. Complimentary passes presented to the press and others should also be included. The insured should be informed of these items so that they can establish an appropriate record.Important points to remember:

• Non-working employees that attend an event, whether on a complimentary pass, free ticket or paid admission, should be counted, and

• Guidance is provided in the notes to "Theaters - drive-in" classification for determining the admissions number

Area Included

• The definition of area in ISO's General Liability Manual is intended to include the following:

• Balconies, porches, steps, verandas, entranceways inside the outer building walls.

• Air shafts, elevator shafts, stairways, and the area of mezzanine floors (excluding the area of the mezzanine floor opening).

• Premises occupied by tenants and concessionaires.

• Vacant Premises.

• Basements - except as excluded below.

• Stockrooms and other areas inaccessible to insured's clients.

Area Excluded

• Courts and mezzanine types of floor openings.

• Portions of basements or floors on which 50% or more of the area is used for shop or storage in connection with building maintenance, dwelling by building maintenance employees, heating units, power plants, or air conditioning equipment.

It is important to remember that this applies only to floors where 50% or more of the area is used for such maintenance activities and then only that portion is excludable. For example, if 40% of one floor of a multi-storied building is used to house an air conditioning unit, the entire area of that floor must be included in the exposure development since it did not meet the 50% limitation.

If the air conditioning unit takes up 70% of the area of that one floor, however, the auditor would exclude 70% of the total area of that floor. The remaining 30% portion of that floor, not used to house the air conditioning unit, should be included in the area exposure development.

EACH

Each as a basis of premium involves units of exposure. The quantity comprising each unit of exposure is indicated in the classification notes.

GROSS SALES

ISO's General Liability Manual defines gross sales as: The gross amount charged by the named insured, concessionaires of the named insured or by others trading under the insured's name for:

• All goods or products, sold or distributed,

• Operations performed during the policy period,

• Rentals (product rentals, not real property), and

• Dues or fees.

A sale is completed when the parties involved agree to the terms of the transaction. The sale could be consummated as a point-of-purchase sale, such as a counter sale in a store, or through a sales agreement such as would be found in a manufacturing firm. It is important to point out here that the basis of premium is gross sales - not taxable sales or net sales. The gross sales of an insured provides the starting point and then the following gross sales inclusions and exclusions should be applied:

Gross Sales Inclusions

Certain items do not represent a change in the liability exposure resulting from the sale of merchandise and therefore are included in the gross sales premium base. These individual items, as described in Rule 24.D.2 of ISO's General Liability Manual, are discussed here in detail.The following items shall not be deducted from gross sales:

1. Foreign Exchange Discounts

If the exchange rate changes between the time a sale is contracted and the time actual payment are made, a foreign exchange gain or loss will result. This gain or loss does not affect the auditable gross sales. A sale is consummated at the time the parties agree on the terms. For example, if goods are sold for 100,000 pesos when the rate of exchange is 10 pesos to the dollar, the journal entry in dollars would be:

Only $8,333 can be realized from the 100,000 pesos paid by the foreign entity, the difference being the loss due to the exchange rate. Recognizing that this transaction will certainly affect the insured's net income, it does not alter the potential liability of our insured reflected in the gross sale of $10,000.

2. Freight Allowance to Customers

A freight allowance is a discount or allowance deducted from the price of a product if the customers themselves pick up the product or arrange for its delivery. Since a freight allowance represents a marketing technique designed to increase sales volume, no deduction is allowed for the discount. For example if a furniture store sells a customer $3,000 in furniture and, since the customer will pick up the furniture, they take $150 off the price. The full $3,000 is the gross sale which should be included in gross sales.

3. Total Sales of Consigned Goods and Warehouse Receipts

In a consignment agreement, a dealer or distributor receives a shipment of merchandise, pays only for what they sell and returns the unsold goods to the consignor. Though the sold merchandise did not actually belong to the insured, the total amount of goods sold must still be included in the auditable gross sales. The gross sales of merchandise sold by consignment auction barns or consignment shops are included in the basis of premium. Many of these stores want the auditor only to include their commission in gross sales, but the customer bought the item in their store, the entire sales price is included. Warehouse receipts reflect charges for the storage of goods sold but not yet received by the customer. These charges should be included in the auditable gross sales as they reflect an additional liability of maintaining goods not owned by the insured.

4. Trade or Cash Discounts

Cash discount programs generally allow a percentage deduction from the regular or list price of a product when the purchaser pays in cash or before a specified date. Sellers provide cash discounts to collect accounts receivable more quickly and to improve their cash flow. An insured offering such a program may invoice his customer using terms of 2/10-net/30. If the purchaser pays within 10 days, the gross invoice amount may be reduced by 2%. Otherwise, the gross invoice amount is due and payable within 30 days. Since the discount for prompt payment does not represent a reduction in liability arising from the sale of the product, no deduction should be made. A trade discount is a deduction from the regular or list price of a product. It is most often allowed by a manufacturer or a wholesaler to a retailer or from one manufacturer to another. The deduction is generally a result of continued patronage by the customer or due to the large quantity being purchased. This latter trade discount is often referred to as a quantity discount. If an insured's records show separately this trade discount, no reduction in the auditable gross sales figure should be applied. The liability exposure is not reduced as a result of this business practice.

5. Bad Debts

The unpaid balance on merchandise bought from an insured should not be excluded from gross sales. The liability exposure for a product exists once the insured has relinquished possession, regardless of the insured's ability to collect the money. The product is still out in the marketplace so there is full liability exposure even though the customer did not complete the payments.

6. Repossession of Items Sold on Installment (Amount Actually Collected)

The repossession of a product limits the liability exposure of a seller to the time period when possession had been relinquished. Once repossessed, only the amount of money actually collected on the sale of the product should be included in the gross sales. Even if monies are collected years after the product has been repossessed, they will be included as gross sales. Additionally, if a repossessed product is resold, the sales price of the repossessed product will be included in gross sales. An example will clarify. Our insured sells a $2,500 computer with terms of $500 down and the balance at the rate of $100 for twenty months. After three months the purchaser stops making payments, so in the fifth month, the computer is repossessed. The auditable gross sales are $800, the $500 down payment and three monthly payments of $100. If the insured resells the repossessed computer as a used computer for $1,500, the $1,500 will also be included in gross sales. If the insured collects $100 from the customer two years later, this revenue will be included in gross sales when collected.

Gross Sales Exclusions

ISO's General Liability Manual provides that certain items may be excluded from the gross sales premium base. Each of these items is addressed here.The following items shall be deducted or excluded from gross sales:

1. Sales or Excise Taxes Which Are Collected and Submitted to a Governmental Division

Taxes which are imposed on the purchaser and collected and remitted directly to a governmental agency by the seller may be excluded. In allowing this adjustment, the liability exposure associated with the sold product is not diminished. The seller merely acts as the revenue collection unit for the governmental agency. The records of the seller must show separately the taxes collected and a governmental payable account. Dealers of liquor, tobacco and similar products which incorporate state or federal taxes within their prices should not automatically have these taxes deducted from their audited gross sales. Only sales and excise taxes that are directly remitted to a governmental agency by the insured will be deducted from gross sales.

2. Credits for Repossessed Merchandise and Products Returned. Allowances for Damaged and Spoiled Goods

When a purchaser returns a product as being unwanted, defective or damaged, the seller will generally allow a sales credit. The sales credit may be excluded from the auditable gross sales if the records are maintained to show separately this adjustment. When an allowance is granted for spoiled or damaged products that are not returned, this allowance may also be excluded from gross sales with proper documentation. In either situation, not only is the sales revenue reduced but also the potential liability as the product is off the market. The return of the product or the agreement that it is damaged in effect cancels the seller's warranty. A reduction in liability also takes place when the seller repossesses a product. Therefore, a sales credit to remove the unpaid balance from a seller's books for a product that has been repossessed may be excluded. However, if any of these products are resold, that sale is included in gross sales.

3. Finance Charges for Items Sold on Installments

Finance charges reflect the value of money and its use over time in purchasing items on installment. Since a sale is transacted when the buyer and seller agree to terms, the finance charges are not a part of the product sale and may be excluded from gross sales when properly shown in the insured's records. If the finance charge is built into the price of the product and not shown separately, no deduction is allowed. 4. Freight Charges on Sales if Freight is Charged as a Separate Item on Customer's Invoice

A freight charge is a separate charge made to a customer for the delivery of a  product. Please note that no distinction is made between a freight charge via common carrier or the insured seller's own means of delivery. If the freight charges are shown as a separate item on the customers' invoices, they may be excluded from the auditable gross sales. The insured's liability exposure is the same whether the product is picked up by the customer or it is delivered. Shipping and handling charges are also separate charges incurred by the purchaser. Whether a percentage charge on the total purchase or a flat dollar amount, shipping and handling generally refers to the expenses incurred by the seller for locating, sorting, packing and shipping a customer's order. As these charges are applied to offset normal expenses incurred in business, and do not reflect only the actual freight charges incurred, they should not be deducted from gross sales.

5. Royalty Income From Patent Rights or Copyrights Which Are Not Product Sales

Money received as royalties from patents or copyrights does not represent the sale of a physical product that could cause a loss and, therefore, may be excluded from gross sales. However, if a risk receives royalties related to a product that they are selling, this income is included.

6. Rental Receipts for Products Liability Coverage Only

Income from renting products will be excluded from gross sales, but for products liability only. This exclusion has no effect on premises liability; the rental income is included in gross sales for the premises subline. For example, some supermarkets rent steam cleaners for carpets. The rental income from the steam cleaner rental will be included in gross sales for the premises subline of the supermarket classification.

Certain items do not represent a change in the liability exposure resulting from the sale of merchandise and therefore are included in the gross sales premium base. These individual items, as described in Rule 24.D.2 of ISO's General Liability Manual, are discussed here in detail.The following items shall not be deducted from gross sales:

MISCELLANEOUS SALES INTERPRETATIONS

Treatment of Foreign SalesThe inclusion or exclusion of foreign sales is an often raised question by auditors. There are actually two different types of operations which must be addressed separately: (1) import and (2) export. However, before we look at these operations, it is important to understand the extent of coverage provided by the Commercial General Liability policy. Section V.4 of the policy provides coverage worldwide for products, defining "Coverage Territory"

as: a. "The United States of America (including its territories and possessions), Puerto Rico and Canada; b. International waters or airspace, provided the injury or damage does not occur in the course of travel or transportation to or from any place not included in a. above; or c. All parts of the world if: (1) The injury or damage arises out of: (a) Goods or products made or sold by you in the territory described in a. above; or (b) The activities of a person whose home is in the territory described in a. above, but is away for a short time on your business; and (2) The insured's responsibility to pay damages is determined in a "suit" on the merits, in the territory described in a. above or in a settlement we agree to."Using this definition as it relates to export operations, the sale of products outside the U.S. should be included in the gross sales and classified under the appropriate classification as though it were sold in the U.S. While no deduction is made for foreign sales, it would still be a good idea to show these separately in the details of the audit and to notify the underwriting department. A named insured who imports goods manufactured outside the U.S. is subject to claims on those products that they sell. The monies collected for the sale of these foreign-produced goods should be included in the gross sales for premium development and assigned to "Importers," code 55410. Again, it is suggested that underwriting be notified of foreign exposure being developed and should be provided with full details on the extent and nature of the operations.

Inter-company Sales ISO's General LiabilityManual provides the following additional information as it relates to the development of gross sales for manufacturing and processing risks:Include all sales of goods or products from one company to another including those sales from one named insured to another.

Therefore, the premium charge should be based on all sales generated by each named insured, including inter-company transactions. This procedure is supported by the following example: ABC, Inc. and XYZ, Inc. are both named insureds on the same policy. ABC, Inc. manufactures metal pipes which are sold to others ($1,000,000) and to XYZ, Inc. ($200,000). XYZ, Inc. manufactures and sells plumbing fixtures. Their gross sales were $3,700,000. The summary for this risk would be as follows:

*Notice that the $200,000 sales to XYZ, Inc. were excluded from Products coverage only by the attachment of the endorsement. Premises coverage exposure was not affected.

Wholesale Value Concept The wholesale value concept comes into play when a manufacturing risk also operates a retail store selling their manufactured products, all under one legal entity. The reason for this is that the manufacturing classifications contemplate the wholesale sale of the manufactured products; however, they do not contemplate the added exposure of operating a retail store. There are two rules in ISO's General Liability Manual that support this concept: Rule 27.A.3 - This rules states that if a manufacturing risk sells their products through their own retail operations, the retail operations will be separately classified from the manufacturing operations.

Rule 27.B.2.c - This rule states that the wholesale value of goods that a manufacturing risk transfers to their retail operations will be included as gross sales in the manufacturing classification. Rule 27.B.2.c is the rule that affects the calculation of the basis of premium for these risks. If a manufacturing risk operates their own retail store, the gross sales of the manufactured product will be assigned to the retail store classification while the wholesale value will be included in gross sales assigned to the manufacturing classification. This way, the carrier will be receiving a separate premium for both the manufacturing operations and the retail store operations. Rule 27.A.3 states that the manufacturing classifications do not contemplate retail store operations. For example, this insured is a shoe manufacturing risk, properly assigned to "Shoe, Boot or Slipper Mfg," code 59005. They also operate a retail outlet store selling outdated stock, over runs, and slightly damaged shoes which is assigned to "Shoe Stores," code 18110. The sales developed by the auditor are as follows: Shoe Sales (sold to other retailers) $2,000,000 ($20 per pair) Shoe Sales (company outlet store) $500,000 ($50 per pair) The $2,000,000 in wholesale sales to retailers will be included in the basis of premium for code 59005 and the $500,000 in retail sales will be assigned to code 18110. If this is all the auditor did, the carrier will not be receiving any premium for the manufacturing exposure for the 10,000 shoes sold by the retail outlet ($500,000/$50). Therefore, the since wholesale value of the shoes is $20 per pair, so multiplying the $20 by 10,000 the wholesale value of these shoes are $200,000. The basis of premium for code 59005 should be $2,200,000, which reflects the total manufacturing exposure of this company.

PAYROLL

Payroll is used as the basis of premium for contracting and servicing classifications. In addition, there are some classifications in the miscellaneous business group that also use payroll as the rating base. Payroll is defined by ISO's General LiabilityManual Rule 24.E as, "Payroll means remuneration" and "Remuneration means money or substitutes for money." The definition is further detailed through the use of the following inclusions and exclusions.

Payroll Inclusions

Payroll audits includes the following items:

Commissions

Commissions are mainly associated with outside salespersons and the payroll of outside salespersons is excluded for general liability. However, some classifications include outside salespersons in the notes so the payroll and commissions of these salespersons will be included in the basis of premium. Additionally, some employees that do not qualify as outside salespersons may receive commissions.

For example, the foreperson of a HVAC installation contractor may try and sell upgrades during installation. If successful, the employee will receive a commission from the sale. These commissions are included in the applicable HVAC contracting classification.

Bonuses

Employees receive bonuses for a wide variety of reasons including, but not limited to an employee's work performance, years with the company, special accomplishments, holidays, and the overall company's financial results. All bonuses are included in payroll.

Extra Pay for Overtime Work

Over time pay is both included in and excluded from payroll. Included in payroll is the straight time portion of overtime pay and excluded is the premium portion. Because of the complexities and special guidelines that pertain to overtime, this item is reviewed after the payroll inclusions and exclusions section.

Pay for Holidays, Vacations or Periods of Sickness

All forms of holiday, vacation and sick pay are included in payroll even though the employees are not physically working during these hours. These benefits are earned by the employees while they are working and are considered part of their payroll. If employees are reimbursed for unused holiday, vacation and sick days, this amount will be included as payroll. This payroll will be included in the classification assigned to the employee's duties. If an employee's payroll is assigned to multiple classifications during the policy period, and the insured has kept the holiday, vacation and sick pay separate - the holiday, vacation and sick pay will be assigned to the classification that developed the most payroll for each employee.

Employer Payments to Statutory Insurance or Pension Plans - Required by Law to be Paid by Employees

Payments made by the employer of amounts that would have been legally withheld from employees' pay to meet statutory obligations should be included in the employee's payroll. Such payments include, but are not limited to Social Security, FICA, SUTA, and payments to pension plans. When the employer makes the payments for which employees are liable for, they should be added back to payroll. However, the portions which are the legal responsibility of the employer are excluded from payroll.

Payments to Employees on Any Basis Other than Time Worked

Examples of these types of payroll include, but are not limited to piecework, profit sharing, incentive plans, and upset payroll. Some assembly companies will pay their shop employees based on the units completed, rather than hours worked. These payments will be included in payroll, even if the employee works from home. Upset payroll is used in the logging industry when loggers are paid by the number of cords of wood produced - this will also be included as payroll.

Payment or Allowance for Hand or Power Tools Provided by Employees

Most common in the construction industry, some contractors will reimburse employees for using their own tools in the course of their employment. These reimbursements will be included is payroll.

Rental Value of an Apartment or House Provided by the Employer

Some employers will, as a part of the employment agreement, provide a free or reduced rent apartment or house to select employees. When this situation is encountered and the classification assigned to the insured's business is rated on payroll, the value of the free or reduced rent is included in payroll.

Value of Lodging Other than an Apartment or House (to the extent shown in the insured's records)

Lodging constitutes temporary shelter while on assignment for an employer; whereas housing represents the permanent abode of the employee that is used as the "headquarters" from which the employee works. When the employer is required to provide lodging as part of the terms of employment, the value of the lodging, to the extent disclosed in the insured's records, shall be included with the actual wages as payroll. However, if an employee is reimbursed for lodging expenses while traveling on business of their employer, such reimbursements are not included as payroll. These are expense reimbursements.

Value of Meals (to the extent shown in the insured's records)

When the employer is required to provide meals as part of the terms of employment, the value of the meals, to the extent disclosed in the insured's records, shall be included with the actual wages as payroll. However, if an employee is reimbursed for the amounts spent on meals while traveling for their employer, such reimbursements are not included as payroll. These are expense reimbursements

Value of Store Certificates, Merchandise, Credits or any other Substitutes for Money

When an insured provides any of these type benefits, in lieu of or as part of their employees' wages, the value of the benefits would be included in the payroll base for premium development. Some employers may adopt such programs at Christmas or fiscal year end instead of a monetary bonus. In any cases, these plans would be treated the same as a monetary bonus and included in payroll. This does not include employee discounts for purchasing items from the employer. For example, if an retail store risk allows their employees a 30% discount on items the employees purchase in the store, this amount is not included in payroll.

Payroll of Mobile Equipment Operators and Their Helpers

Insured's EmployeesThe payroll of mobile equipment operators, regardless of whether such operators are designated or licensed to operate automobiles, is included. For example, if a metal erection contractor employs a crane operator, the payroll of the crane operator will be included in the appropriate "Metal Erection… classification assigned to the insured's business.Equipment Rented from OthersMobile Equipment with Operators. If mobile equipment is hired by the insured with operators, the payroll of the operator is included and assigned to the appropriate construction classification assigned to the insured's business. If the actual payroll records cannot be obtained, then 1/3 of the total amount paid for the hire of the mobile equipment is used as wages. Even if the insured has a certificate of insurance from the mobile equipment rental business, the payroll of the operator is included in payroll as the insured has direction and control over the conduct of the equipment and operator. Mobile Equipment without Operators. When the insured hires mobile equipment without operators; the premium is based on the payroll of the insured's employees operating the mobile equipment. This payroll will be assigned to the classification assigned to the insured's operations.

Payroll of Executive Officers and Individual Insureds and Co-Partners

Rule 24.E.2.m provides for a flat amount (or in some states a minimum and maximum) which should be included in payroll for executive officers, sole proprietors and co-partners. The auditor should refer to the state rate or exception pages of ISO's General Liability Manual for these amounts. Additional sources of this information can be found in the Rating Information section of PAASbase™ and in the PAAS® Audit Information Summary Card. The payroll of these individuals is to be assigned to the appropriate classification(s), the same as for any other employee. If, however, they are engaged principally in clerical operations or as salespersons they are excluded for premium computation purposes. Part-time or seasonal business may have the payroll amounts for officers, proprietors and co-partners reduced, if the business operations cease for an extended period of time. The amount included for these individuals, whether flat amount or payroll subject to minimum and maximum, may be reduced by 2% for each full calendar week in excess of twelve during which the risk performs no operations. For example, a paving contractor is shut down for 20 weeks during the winter months. If one of the executive officers supervises the paving crew and is included at the flat amount of $52,000; the auditor may reduce this amount by 16% (20 - 12 = 8 - 8 x 2% = 16%) or $8,320. This executive officer will be included at $43,680.

Payroll of Leased Workers

The liability exposure of workers leased from an employee leasing firm is covered by the insured's policy. The reason for this is these employees are working under the direction and control of the insured, not the employee leasing company. The leased workers are classified as if they are direct employees of the insured. If the auditor has access to the individual payroll records, they should be used. If not, the total amounts paid to the employee leasing company will be included as payroll.

Fees Paid to Employment Agencies

The liability exposures created by temporary personnel working on behalf of the insured would be covered by the insured's policy as these employees are working under the direction and control of the insured. The temporary employees are classified as if they were direct employees of the insured. The auditor should include the entire fees paid to the employment agency not just the wages paid to the temporary employees.

Payroll Exclusions

According to ISO's General Liability Manual, payroll does not include the following for premium computation purposes:

Tips and Other Gratuities

Tips and other gratuities received by employees are excluded. Two conditions must be met when defining tips or gratuities, (1) the money or tip must be "freely given, and (2) the tip amount must be controlled by the customer, not the employer. The essence of the tips exclusion is that these amounts are not paid or controlled by the employer. Tips are normally associated with restaurant operations and restaurants are rated on gross sales - not payroll. However, some restaurants will request that service charges to be excluded from gross sales. Service charges, such as an 18% tip will be added to all parties of 8 or more, do not qualify as tips as they are not controlled by the customer. Additionally, the tips exclusion only applies to payroll, there is no tips exclusion to gross sales.

Payments to Group Insurance or Pension Plans for Employees

Contributory payments made by an employer in connection with group insurance or group pension programs are not to be included in the premium computation. However, if an employer makes payments to these plans that are required by law to be paid by their employees, such payments are included in payroll. In additional to group insurance and pension plans, employer matching payments to Social Security, FICA and SUTA should not be included in payroll.

Value of Special Rewards for Invention or Discovery

These rewards are generally one-time payments for the invention or discovery of a new product, product line, or process which streamlines the company's procedures. To encourage employee participation, the rewards program is generally a part of the overall company benefit package. These rewards are not bonuses, although they may be treated as such by insureds - bonuses are included in payroll. These are one-time special payments when an employee discovers or invents something that will benefit the company.

Dismissal or Severance Payments

When an employee resigns, retires or is terminated, severance (dismissal) payments may be provided to the individual. A typical severance benefit will be 1 week pay for each completed year working for the company and such payments should not be included in payroll. However, part of the overall severance package could be payments for accrued holiday, vacation and sick pay. These payments are included in payroll as they have been earned by the employee. An auditor must verify that only the severance pay is being excluded and any accrued holiday, vacation and sick pay is included in payroll.

Payroll of Clerical Office Employees There are two qualifications that an employee must meet for their payroll to be excluded as a clerical office employee: They must work in a physically separated office from the operative hazards of the business. This would typically be walls, floors or other partitions.  Their duties must be strictly limited to maintaining the insured's book and records, conducting correspondence and other clerical tasks in the same physically separated work are. Acquiring a detailed job description is key to properly applying this exclusion. For example, an employee for a contractor may work 100% in the office, but if this employee is performing executive supervisor duties, these duties fall outside of the definition of the duties of a clerical office employee, and the payroll of this employee should be assigned to "Contractors - Executive Supervisors or Executive Superintendants," code 91580.

Payroll of Salespersons, Collectors or Messengers The payroll of these employees who work principally away from the insured's premises will be excluded from payroll. This exclusion contemplates the incidental clerical operations associated with these jobs.  If any of these employees also work or supervise the work being performed, the entire payroll of such employees is included in payroll. For example, if the salesperson of a masonry contractor also supervises the masons performing the masonry work, the entire payroll of the salesperson is included in "Masonry," code 97447.

Payroll of Drivers and Their Helpers The payroll exclusion for drivers and their helpers applies only if the employee was hired principally as a driver or helper. Additionally, this exclusion only applies to the wages while driving. There is different application of this exclusion when compared to the exclusion for clerical office and outside salespersons. Clerical office and outside sales require the duties to be strictly limited to that particular type of work whereas the driver exclusion is based on principal duties. A couple of examples will clear this up.  If an employee is hired by an excavation contractor principally as a dump truck driver, and all the employee does is drive the truck, this employee's entire wages are excluded. However, if $30,000 of this employee's wages was for dump truck driving and $10,000 was for filling in operating a backhoe, the $10,000 will be included in "Excavation NOC," code 94007. The $30,000 is excluded as the employee's principal duty is that of a dump truck driver.  If you take the example above and reverse the employee's duties; $30,000 in payroll for operating the backhoe and $10,000 for driving the dump truck. Since this employee is hired principally to operate the backhoe, the driver's exclusion does not apply and the entire $40,000 in payroll is included in "Excavation NOC," code 94007.

Payroll of Aircraft Pilots or Co-Pilots

 This exclusion is treated the same are the exclusion for drivers - based on principal duties.  If an employee is hired exclusively to operate the aircraft, the entire payroll is excluded.  If an employee is hired primarily to operate the aircraft, and has other duties directly related to the insured's business, the payroll for the non-flying duties will be included in payroll, unless they qualify for one of the other exclusions (clerical, outside sales, and drivers).  If an employee primarily performs work that is included in a payroll-based classification, and occasionally flies the aircraft - the entire payroll of such employees is included in the appropriate payroll-based classification.  Payroll of Drafting Employees  The payroll of drafting employees is NOT excluded from the audit, only excluded from the payroll-based classification assigned to the insured's business. The payroll is included in "Draftsmen," code 91805. Additionally, the payroll of drafting employees is excluded from the payroll-based classification assigned to the insured's business only if such drafting employees are not exposed to the operative hazards of the insured's business.  For example, if a drafting employee working for an architect exclusive works in the office, this employee's payroll is assigned to "Draftsmen," code 91805. However, if according to plans, the payroll will now be assigned to "Engineers or Architects - consulting - not engaged in actual construction," code 92663.

Payroll - OvertimeRule 24.E.4 in ISO's General Liability Manual provides guidance in handling overtime pay. Rule 24.E.4.a defines what constitutes overtime and Rule 24.E.4.b explains what is excluded from overtime pay. The following is Rule 24.E.4.a:

The rule defines overtime as hours worked at an increased rate of pay, but then limits the scope of overtime only to when the number of hours worked exceed the standard hours worker (daily or weekly basis) and for work on Saturdays, Sundays and holidays. This definition leaves certain pay out of overtime, namely guaranteed wage agreements and shift differentials. Neither of these type payments, by themselves, qualifies as overtime. However, if an employee works excess hours that qualify as overtime, the excess may be excluded as overtime. For example, an employee works at a job making $10 per hour. When the employee starts working the night shift, the employee receives $12 per hour with $2 being a shift differential. The $2 per hour is not overtime. If this employee works over 40 hours per week, the employee is paid time and one half and the rate increases to $18 per hour. The increase of $6 is premium overtime and should be excluded from payroll. Rule 24.E.4.b follows up this rule by defining what is excluded as overtime pay, which is not the entire amount. The following bullets will bring out the key points:

. It is the insured's responsibility to keep their records so that the auditor can determine the premium overtime. The records must show the overtime pay separately either by employee or summarized by classification. It is not the auditor's responsibility to go through the insured's records and calculate the overtime on a weekly basis.

.  There are two methods for insureds to maintain their overtime payroll separately:

.  If the overtime records only show the premium, or additional, overtime pay - the entire amount should be excluded.

. If the total amount of overtime pay is included in overtime, the base pay plus the premium pay, only the premium pay will be excluded.

.  If the overtime is paid at time and one half, 1/3 of the total overtime pay will be excluded.

. If the overtime  pay is paid at double time, 1/2 of the total overtime pay will be excluded

.  It is very important for auditors to verify how much of the total overtime pay is being separated in the insured's records. The auditor can spot check the records by dividing the hours worked into the regular pay and compare it to the same calculation for the overtime pay to determine what amount is included in the overtime pay

. Care should be taken in reviewing the amounts included in the overtime column of the insured's records as  this column is sometimes used for such items as bonuses, jury duty pay, shift differential, vacation pay or holiday pay.

. The overtime exclusion does not apply to stevedoring risks. For all stevedoring classifications, no overtime credits shall be given - even if the insured maintains proper payroll records.

Example: John Doe works in a manufacturing plant and receives an hourly rate of pay of $20.00. When John works in excess of the normal forty-hour week, he receives time and one-half, or $30.00 per hour. During the week, John worked 50 hours. The bookkeeper could calculate John's wages in either of the following ways:

While the gross wage for John is the same, the method of calculation overtime differs substantially. Method 1 shows only the premium overtime pay while Method 2 reflects the gross overtime pay. When an auditor is auditing an insured using Method 1, the total amount ($100.00 in this case) will be excluded. However, when encountering Method 2, 1/3 of the total amount ($300/3 = $100) will be excluded. This will ensure that the correct amount of overtime will be deducted no matter what the insured's' bookkeeping practices are.

This is one of the most difficult premium bases to determine, which may be one of the reasons that it is frequently misapplied. Determining total cost usually necessitates a review of the job cost records of a contractor. It can be a time-consuming task which leads us to the frequent misapplication.Shortcuts are often taken by including only the amounts shown in the general ledger or the cash disbursement journal under the heading of "Subcontractors". However, total cost also includes materials and equipment delivered for use in the execution of the work. This means that the auditor must also include the cost of materials and equipment that the insured furnishes to their subcontractors on the job.

Consider a situation involving the construction of a single-family, detached private residence in which the general contractor involved uses only subcontractors. Though many of the subcontractors will provide both labor and material in performing their tasks, the general contractor will also provide the equipment and many of the materials used on the project. The total cost of the residence is not only what is paid to the subcontractors (whether they provide their own materials or not) but also all the materials and equipment provided by the insured that is used in constructing the house.

TOTAL OPERATING EXPENDITURES (Rule 24.G)

Total operating expenditures is used as a basis of premium for only one type of risk, governmental subdivisions. The auditing of municipalities is unique as these risks have their own set of accounting principles. Thus, these risks are rated on total expenditures defined by Rule 24.G.1 in ISO's General Liability Manual as follows:

Total expenditures (including grants, entitlements and shared revenue) without regard to source of revenue during the policy period, including accounts payable.

This is one of the most difficult premium bases to determine, which may be one of the reasons that it is frequently misapplied. Determining total cost usually necessitates a review of the job cost records of a contractor. It can be a time-consuming task which leads us to the frequent misapplication.Shortcuts are often taken by including only the amounts shown in the general ledger or the cash disbursement journal under the heading of "Subcontractors". However, total cost also includes materials and equipment delivered for use in the execution of the work. This means that the auditor must also include the cost of materials and equipment that the insured furnishes to their subcontractors on the job.

Consider a situation involving the construction of a single-family, detached private residence in which the general contractor involved uses only subcontractors. Though many of the subcontractors will provide both labor and material in performing their tasks, the general contractor will also provide the equipment and many of the materials used on the project. The total cost of the residence is not only what is paid to the subcontractors (whether they provide their own materials or not) but also all the materials and equipment provided by the insured that is used in constructing the house.

UNITS

(Rule 24.H)This basis of premium refers to the quantity of exposures involved, normally used with habitation classifications. The manual defines units as a single room or group of rooms intended for occupancy as separate living quarters by a family, by a group of unrelated persons living together, or by a person living alone. Examples of this are the various apartment building classifications. The size of each units or the total square footage of each unit does not matter. A studio apartment counts as one unit just as a three bedroom apartment would also count as one unit.