Form IL 00 03 - Calculation Of Premium
1. What the form is
The IL 00 03, titled "Calculation Of Premium," is an Interline Form used across various commercial lines of insurance. Its primary purpose is to stipulate that the premium shown in the Declarations is based on the rates in effect when the policy was issued. Crucially, it outlines that on each renewal, continuation, or anniversary of the policy's effective date, the insurer will recompute the premium using the rates and rules applicable at that future point in time. This form is essential for policies where the premium can change over the policy term or at renewal due to factors like changes in exposure, rating methodologies, or regulatory requirements. It ensures transparency in how premiums are determined, especially for policies with terms longer than one year or those subject to audit.
2. Classes of business it applies to
The IL 00 03 is a common policy form, meaning it's not restricted to a single line of business but can be attached to various commercial coverage parts. It is frequently used in conjunction with policies that have auditable exposures or are written for terms longer than one year. Examples of coverage parts where this endorsement is commonly found include:
- Commercial General Liability (CGL)
- Commercial Automobile Coverage Part
- Commercial Property Coverage Part
- Commercial Inland Marine Coverage Part
- Crime and Fidelity Coverage Part
- Farm Coverage Part
- Products/Completed Operations Liability Coverage Part
- Employment-Related Practices Liability Coverage Part
- Liquor Liability Coverage Part
- Pollution Liability Coverage Part
For instance, a construction company with a Commercial General Liability policy might have this form attached. If their initial premium was based on an estimated payroll, the IL 00 03 allows the insurer to adjust the premium at the policy anniversary based on the actual audited payroll and any rate changes effective at that time. Similarly, a business with a multi-year property policy would see this endorsement, ensuring that each year's premium reflects current rates.
3. Special considerations
There are several important considerations when the IL 00 03 is part of a policy:
- Policy Term: This endorsement is particularly relevant for policies written for a term longer than one year or on a continuous basis. It clarifies that the initial premium is not guaranteed for the entire policy period if rates or rules change.
- Auditable Policies: For policies where the final premium is subject to audit (e.g., based on sales, payroll, or mileage), this form works in conjunction with the audit provisions. The audit determines the exposure, and the IL 00 03 ensures the correct rates are applied for the relevant period.
- Rate Changes: Insureds should be aware that their premium can increase or decrease at renewal or anniversary based on the insurer's then-current rates and rules. This is not a unilateral change by the insurer but a provision agreed to at policy inception through this endorsement.
- Regulatory Environment: Premium calculation methodologies can be subject to state insurance department regulations. While the IL 00 03 is a standard form, its application must align with any state-specific rules regarding rate changes and premium adjustments.
- Minimum Premiums: For policies with an annual premium payment plan, if the estimated annual premium is below a certain threshold (e.g., $500 in some ISO rules), the rate and premium adjustment for a policy written for more than one year might be deferred until policy termination. However, the IL 00 03 would still generally be attached.
A real-world example: A trucking company has a Commercial Auto policy with an initial premium based on an estimated mileage for their fleet. The IL 00 03 allows the insurer to adjust the premium at the policy anniversary if the insurer's auto rates have changed and also ensures the final premium reflects the actual mileage reported during the policy period.
4. Key information for agents and underwriters
Agents and underwriters should be mindful of the following when dealing with the IL 00 03:
- Transparency with Insureds: Agents must clearly explain to insureds, especially those with multi-year policies or auditable exposures, that their premium can change at anniversary or renewal due to this provision. Managing expectations is key to good customer relations.
- Pricing Accuracy: Underwriters rely on this form to ensure that policies are priced accurately over time, reflecting current risk assessments and rating structures. It allows for adjustments without needing to non-renew and rewrite a policy solely due to rate updates.
- System Updates: Insurers' policy administration systems must be capable of correctly applying new rates and rules at policy anniversaries or renewals as stipulated by this endorsement.
- Consistency: The IL 00 03 promotes consistency in how premiums are calculated for policies that extend beyond one year or are subject to future adjustments.
- Interplay with Other Endorsements: While the IL 00 03 itself doesn't dictate the specific audit terms or exposure bases, it supports the mechanics of premium adjustment that other endorsements or policy provisions might detail. For example, it's often used with forms that specify how payroll or sales will be audited for premium computation.
- Renewal Process: At renewal or anniversary, underwriters should ensure that the premium is recalculated based on the then-current rates and rules, and that any changes are clearly communicated to the insured, referencing the IL 00 03 if necessary.
For an underwriter, when a policy includes coverage parts like Commercial Auto and is written on an annual premium payment plan, the IL 00 03 is typically attached to ensure premiums at inception and on each anniversary are based on the rates effective at those respective times.