Rule 2 - Premium and Payroll

Revision History

Type

Effective Date

Circular

Notes

Revision

07/01/2021

C-21-12

Revisions to North Carolina Basic Manual for Workers Compensation and Employers Liability

Revision

03/01/2020

C-20-31

NCCI Item B-1443 – Revisions to NCCI Manual Rules Related to the COVID-19 (Coronavirus) Pandemic – Removal of Expiration Date

Revision

03/30/2020

C-20-17

Revisions to North Carolina Basic Manual Rules Related to the COVID-19 (Coronavirus) Pandemic

Revision

10/01/2017

C-17-6

NC Basic Manual NCCI Item B-1433 - Part 1 Rules 1 and 2

Original

04/01/2016

C-16-6

North Carolina Basic Manual for Workers Compensation and Employer Liability - Digital Edition

 

 

A. Premium

Premium is calculated on the basis of the total payroll paid or payable by the insured for services of employees who are eligible to receive workers compensation benefits for work-related injuries as provided by the policy.  Some classifications may have a different premium basis.  See example below:

Example:

Premium is calculated for domestic workers on a per capita basis instead of payroll. Domestic workers are employees who perform household duties. See Rule 3-C for additional information.

A per capita classification uses the number of workers rather than payroll to measure exposure.

B. Payroll

For purposes of this manual, the terms "payroll" and "remuneration" mean money or substitutes for money.

1. Includes:

a.  Salary or wages (including retroactive salary or wages).

b.  Total pay received by an employee for commissions and draws against commissions.

c.  Bonuses and stock bonus plans.  See Rule 2-D.

d.  Extra pay for overtime work except as provided in Rule 2-C-2.

e.  Pay for holidays, sick leave, or vacations.  See Rule 2-G-3 for allocation of payroll for employees subject to more than one classification code.

f.  Employer payments withheld from employees to meet statutory obligations for insurance and/or pension plans, such as the Federal Social Security Act or Medicare.

g.  Payment to employees on any basis other than time worked, such as piecework, profit sharing, or incentive plans.

h.  (RESERVED FOR FUTURE USE)

i.  The rental value of a house or apartment provided to an employee based on comparable accommodations.

j.  The value of lodging, other than an apartment or house, received by an employee as part of their pay as shown in the insured’s records.

k.  The value of meals received by employees as part of their pay as shown in the insured’s records.

l.  The value of store certificates, credits, merchandise, or any other substitute for money received by employees as part of their pay.

m.  Payment for retirement or cafeteria plans (Internal Revenue Code 125), health savings accounts, flexible spending accounts, employee savings plans, or salary reduction that is made through employee-authorized salary reductions from the employee’s gross pay.

n.  Davis-Bacon Act wages (A federal law that establishes the requirement for paying the local prevailing wages on public works projects) or wages from similar prevailing wage laws.

o.  Annuity plans.

p.  Expense reimbursements to employees if the employer’s records do not confirm that the expense was incurred as a valid business expense. Refer to Rule 2-B-2-h for contractual allowable travel expenses.

Exception:
When it can be verified that the employee was away from home overnight on business for the employer, but no verifiable receipts for incurred expenses have been retained, a reasonable expense allowance, also known as a per diem, is permitted to be excluded.  The allowance is limited to a maximum of $75 per day.  The remaining non-verifiable expenses are included as payroll.

q.  Payment for filming commercials for the insured, excluding subsequent residuals that are earned by the commercial’s participant(s) each time the commercial appears in any type of media.

2. Excludes:

a.  Tips or other gratuities received by employees.

b.  Group insurance or group pension payments made by an employer for employees, other than those covered by Rule 2-B-1-f and Rule 2-B-1-m.

c.  Payments by an employer into third-party trusts for the Davis-Bacon Act or similar prevailing wage laws, provided the pension trust is qualified under the Internal Revenue Code, Sections 401(a) and 501(a).

d.  The value of special rewards for individual invention or discovery.

e.  Payments for dismissal or severance except for time worked or vacation accrued.

f.  Payments for active military duty.

g.  Employee discounts on goods purchased from the employee’s employer.

h.  Expense reimbursements to employees if the employer's records confirm that the expense was incurred as a valid business expense.

Flat expense allowances and reimbursed expenses paid to employees may be excluded from the audit if all three of the following conditions are met:

1)  The expenses or allowances are incurred for the business of the employer

2)  The amount of each employee’s expense or allowance is shown separately in the records of the employer.

3)  The amount of the expense or allowance approximates the actual expense incurred by the employee in the conduct of their work.

NOTE:  If an employer did not maintain verifiable receipts for incurred expenses for an employee that was away from home overnight on the business of an employer a maximum expense allowance is permitted to be excluded.  Refer to Rule 2-B-1-p exception for the maximum employee expense allowance.

Allowable travel expenses permitted by any contract with a federal, state, or local government entity, including, but not limited to, a city, borough, or village, are excluded from payroll.  In lieu of verifiable receipts for incurred expenses, the employer must produce a copy of the contract provision permitting the travel expenses at audit.  The allowable travel expenses must be in addition to the current wage of the employee.

Example of payroll exclusions:

Consider an employer that allows a $0.55 per mile reimbursement for an employee that uses a personal vehicle for company business.  The employer considers the $0.55 per mile reimbursement a fair estimate of actual incurred expenses.  The employee drives 100 miles in a personal vehicle for the company.  The $55.00 reimbursement (100 miles x $0.55) is a fair estimate and is excluded from payroll.

i.  Meal money for late work

j.  Work uniform allowance

k.  Disability income benefits paid to an employee by a third party such as an insured’s group insurance carrier

l.  Employer-provided perks including, but not limited to:

1)  Use of company car

2)  Airplane flights

3)  Incentive vacations (e.g., contest winners)

4)  Discounts on property or services

5)  Club memberships

6)  Tickets to entertainment events

7)  Educational assistance

8)  Relocation and moving expenses

m.  Employer contributions to employee benefit plans such as:

1)  Employee savings plans

2)  Retirement plans

3)  Cafeteria plans (Internal Revenue Code 125)

4)  Health savings accounts

5)  Flexible spending accounts

These include any contributions made by the employer, at the employer’s expense, which are based upon the amount contributed by the employee.

n.  Payments made by an employer or any public governmental entity to paid furloughed employees as a result of federal, state, and/or local emergency orders, laws or regulations, issued due to the COVID-19 (coronavirus) pandemic which impact an employer's staffing or business operations.

However, any appropriated funds or loans received by an employer as authorized by any law or regulation, or public governmental entity, that are used by an employer specifically to retain or hire working employees are not excluded.

Refer to Rule 2-F-3 for the definitions of paid furloughed employees and payments to paid furloughed employees.

This Rule 2-B-2-n is effective March 1, 2020. This rule will continue to remain in effect and will not expire until determined at a later date as circumstances warrant and in consultation with state regulatory authorities. A future filing will be made to establish an expiration date to this rule as determined and approved by the regulator.

C. Overtime

1. Definition

Overtime means hours worked for which there is an increase in the rate of pay:

a.  For work in any day or in any week in excess of the number of hours normally worked.

b.  For hours worked in excess of 8 hours in any day or 40 hours in any week.

c.  For work on Saturdays, Sundays, or holidays.

If a guaranteed wage agreement exists, overtime means only those hours worked in excess of the number specified in that agreement.

NOTE:  Forms of incentive pay, commonly referred to as “shift differential” or “premium pay” associated with working other than normal day shift hours during the standard workweek are not considered overtime.  See Rule 2-C-2-d for more information on premium pay.

Examples of incentive pay:

2. Exclusions of Overtime Payroll

a. Payroll Records

Extra pay for overtime is excluded from payroll on which premium is calculated as indicated in the table below, provided that the insured’s books and records are maintained to show overtime pay separately by employee and in summary by classification.  Extra pay is the difference between the regular pay rate and the overtime pay rate multiplied by the number of overtime hours worked.

Example of overtime pay:

For the first 4 hours of overtime, the rate is time-and-a-half; thereafter, it is double time.  If an employee continues to work after 12 hours total time, he or she is paid for an extra half hour as “supper money.”  The extra pay earned for overtime, including the food money, is deducted.

Calculating Overtime

 

If the records show…

Then…

Extra pay earned for overtime separately…

The entire extra pay is excluded.

Total pay earned for overtime (regular pay plus overtime pay) in one combined amount, and time and one-half is paid for overtime…

1/3 of this total pay must be excluded.

Double time is paid for overtime and the total pay for such overtime is recorded separately…

1/2 of the total pay for double time must be excluded.

NOTE:  The only portion of the overtime payroll that is deductible is the amount in excess of wages that would have been applied if the overtime were compensated at the regular rate of pay.

Exception to Rule 2-C-2-a:

Exclusion of overtime pay does not apply to payroll assigned to any stevedoring classifications with a code number followed by the letter “F” (meaning it includes USL&H coverage).

b. Hours Worked

Extra pay for overtime is deducted only if the employee receives extra pay for:

No overtime deduction is permitted for wages earned by employees who work in excess of 40 hours per week but do not receive an increase in their normal hourly rate of pay for the overtime work.

Examples of overtime pay that may or may not be deductible:

If the employee had received $10 per hour for the 41st through 44th hour, that employee would not have received extra pay for overtime.

c. Guaranteed Wages

Guaranteed wage contracts or agreements exist in certain industries under which the employee receives a guaranteed wage for work up to a specified number of hours per week, such as 50. For example, the guaranteed wage may be calculated on the basis of 40 hours at straight time and 10 hours at 1 ½ times the basic hourly wage.  Under guaranteed wage plans of this general type, the full guaranteed wage is included in the premium calculation for any hours that an employee works up to the maximum number of hours covered by the guaranteed wage, regardless of how this wage is calculated.  For guaranteed wage contracts or agreements, the overtime rule is applicable only to earnings in excess of the guaranteed wages.

Examples of guaranteed wages:

d. Premium Pay

This rule applies with respect to higher rates of pay that are paid at the traditional overtime hourly rate of pay for work on Saturdays, Sundays, or holidays at the traditional overtime hourly rate, even though the employee has not worked the normal workweek, because work on these days has been regarded traditionally as overtime and not as part of the normal workweek.

Premium pay is extra compensation paid to employees who work nights, holidays, weekends, other special hours, or work under unusual conditions.  This premium pay is not considered overtime pay when it is the normal pay for working these shifts.

Consider an employee that works a 40-hour night shift at a rate of $15 per hour.  The day shift rate of pay for the same work is $10 per hour.  No overtime deduction is made from the $15 per hour since this is considered premium pay.  If the night shift employee works more than the normal number of hours and receives pay in excess of the normal $15 per hour, only the excess is considered overtime.

Examples of premium pay:

D. Payroll Limitations

1.  Specific limitations may apply to:

a. Payroll for executive officers, members of limited liability companies, partners, and sole proprietors

b. Classifications with notes that indicate payroll limitations

2.  Payroll limitations apply after any exclusions of extra pay for overtime, refer to Rule 2-C-2-a.

3.  Payroll used to calculate premium must exclude that part of the employee's average weekly pay that exceeds the applicable weekly limitation, provided:

For more information on payroll, refer to Rule 2-B

4.  Partial weeks are considered full weeks when determining average weekly pay.  Total time of any worker employed during the policy period is the sum of the portions of all verbal or written agreements with that employee that fall within the policy period.

5.  For the purpose of applying the payroll limitation rule, bonuses paid during the policy term must be earned during the policy term.  They are prorated for the period of employment during the policy term to determine the average weekly bonus to be added to the average weekly pay.  For additional information on bonuses, refer to Rule 2-B-1-c.

Example of prorating bonuses for the purpose of applying the payroll limitation rule:

Average weekly bonus to be added to average weekly wage is $30 ($1,560 divided by 52 weeks).

E. Executive Officers, Members of Limited Liability Companies, Partners, and Sole Proprietors

1. Executive Officers

Executive officers of a corporation or unincorporated association are the president, vice president, secretary, treasurer, or any other officer appointed in accordance with the charter or bylaws of such entity.

Executive officers may be paid by one or more corporations.  In some cases, the multiple corporations may be insured by a single carrier under one or more policies.  If so, the multiple corporations are considered a single unit with respect to the application of the executive officer rule.  In all other cases, the rule applies on a per policy basis.  For additional information regarding majority interest, see Rule 3-A-14.  For rules regarding combination of entities, refer to the Experience Rating Plan Manual.

In North Carolina, executive officers of a corporation or unincorporated association are eligible for benefits under North Carolina workers compensation statutes and/or regulations. An executive officer may opt to be excluded from coverage using the standard Partners, Officers and Others Exclusion Endorsement (WC 00 03 08). See N.C.G.S. 97.2 for more detailed information on executive officer inclusion or exclusion.

a. Classification Assignment

Executive officers must be assigned to the classification that applies to the principal operations in which the executive officer is engaged.

Exceptions:

b. Premium Determination

Premium for executive officers is based on their total payroll, subject to the following limitations and the requirements of Rule 2-D:

1)  The minimum individual payroll for an executive officer is shown in the Miscellaneous Values section.

2)  The maximum individual payroll for an executive officer is shown in the Miscellaneous Values section.

3)  Payroll limitations listed in Rules 2-E-b-1 and 2-E-b-2 above apply to the average weekly payroll of each executive officer for the number of weeks the officer was employed during the policy period.

When an individual is not an executive officer for the entire policy period, the payroll limitation is prorated based on the number of weeks that the individual was an executive officer.

4)  Payroll is subject to minimum and maximum limitations and included when one of the following apply:

5)  Payroll is excluded when:

c. Executive Officers Performing Flight Duties

If an executive officer acts as a pilot or member of the flying crew of an aircraft used in the insured’s business, the payroll of that executive must be assigned as follows:

1)  For each week that the executive officer did not perform flight duties, the classification of the principal operations in which the executive officer is engaged should be used.

2)  For each week that the executive officer did perform flight duties, the officer’s payroll for that week should be assigned to the appropriate aviation - flying crew classification.  However, if the executive officer’s non-flight duties in that same week are subject to a higher rated classification, assign that higher rated classification for that week.

NOTE:  These rules apply on the basis of the pilot’s logbook, which is required under federal regulations, or on the basis of verifiable records.

3)  If an aviation - flying crew classification applies and verifiable records are not kept to indicate those weeks during which flying is performed by the executive officer, assign the executive officer’s payroll to the highest rated classification that applies to any of his or her duties.

2. Members of Limited Liability Companies (LLC)

In North Carolina, members of an LLC are eligible for benefits under North Carolina workers compensation statutes and/or regulations. A member may opt to be included on the policy using the Standard Sole Proprietors, Partners, Officers and Others Coverage Endorsement (WC 00 03 10). When a member of an LLC is included on the policy, that member receives the same policy coverage as an employee.

a.  Treatment

For the purposes of this rule, references to members or managers will collectively be referred to as members of LLCs.  For coverage election purposes, a member of an LLC is to be treated as a partner or sole proprietor.

b.  Payroll Determination

Payroll for each member electing coverage is based on the payroll amount shown in the Miscellaneous Values section.  

3. Partners or Sole Proprietors

Partners and sole proprietors are not normally included in the category of employees, but they may elect to be covered in the North Carolina workers compensation policy using the Standard Sole Proprietors, Partners, Officers and Others Coverage Endorsement (WC 00 03 10).

If a partner or sole proprietor elects coverage, he or she has the same status as employees under the policy.

Payroll for each partner or sole proprietor electing coverage is based on the payroll amount shown in the Miscellaneous Values section.

4. Applicable Endorsements

F. Wages for Time Not Worked

1. Idle Time

Idle time is downtime that occurs when employees are not working and the employer pays the employees for the time not worked.

All wages paid to the employee for idle time must be included in payroll. Wages paid during this time are assigned to the classification for work normally performed by the employee under the following circumstances:

For the purposes of this Rule 2-F-1, idle time does not include "paid furloughed employees" or "payments to paid furloughed employees" as provided in Basic Manual Rule 2-F-3. This paragraph will continue to remain in effect and will not expire until determined at a later date as circumstances warrant and in consultation with state regulatory authorities. A future filing will be made to establish an expiration date to this paragraph as determined and approved by the regulator.

NOTE:  For idle time by construction, erection, or stevedoring risks refer to Rule 2-F-2.

Example of wages paid for time not worked:

An insured’s employees regularly work 8 hours per day, 5 days a week.  In a given week, there were two work stoppages for a total of 3 hours, because of delays in delivering of materials to the site.  The employees were paid their regular rate of pay while idle for the 3 hours.  The payroll is assigned to the classification for the work normally performed and is included in the policy’s payroll audit.

Note:

COVID-19 Pandemic - Assignment of Classification Code 8871-Clerical Telecommuter Employees for Temporary Change in Duties

Operations of a higher-rated classification that have been amended to clerical telecommuting due to the North Carolina governor-declared stay-at-home order qualify to be assigned to Classification Code 8871-Clerical Telecommuter Employees for the duration of the stay-at-home order. This provision shall apply while the operations perform duties consistent with Code 8871's definition, from when North Carolina's stay-at-home order took effect on March 30, 2020 and for up to 45 days after the stay-at-home order has been lifted. This provision shall not apply to operations that meet the definition of a classification code that includes Clerical Office Employees.

2. Wages Paid to Key Employees

Wages paid to key employees of construction, erection, or stevedoring risks must be classified based on the work that each one actually performs during the periods where no jobs are in progress.

Exception:

If the job duties of the key employees for construction, erection, or stevedoring risks consist exclusively of drafting or other office work, or if these employees are completely idle, the wages must be assigned to Code 8810. Code 8810 is not available for the office time of an employee assigned to classification code 5606.  It is expected that an employee assigned to classification code 5606 will spend a considerable portion of time engaged in duties typically assigned to Code 8810.

3. Payments to Paid Furloughed Employees During Federal, State, and/or Local Emergency Orders, Laws, or Regulations Issued Due to the COVID-19 (Coronavirus) Pandemic

For purposes of this Rule 2-F-3, ”paid furloughed employees” and “payments to paid furloughed employees” are defined within this rule. “Paid furloughed employees” means employees who continue to receive payments during a temporary layoff or an involuntary leave and are not performing any work duties for an employer.

“Payments to paid furloughed employees” means payments made by an employer or any public governmental entity to paid furloughed employees as a result of federal, state, and/or local emergency orders, laws or regulations, issued due to the COVID-19 (coronavirus) pandemic which impact an employer’s staffing or business operations. Such payments do not include any appropriated funds or loans received by an employer as authorized by any law or regulation, or public governmental entity, that are used by an employer specifically to retain or hire working employees.

Payments to paid furloughed employees must be assigned to Code 0012, in accordance with the Statistical Plan. Payments to paid furloughed employees made in accordance with this Rule 2-F-3 are excluded from the premium and experience rating calculations only if the employer keeps separate, accurate, and verifiable records. If separate, accurate, and verifiable records are not maintained, payroll is assigned to the classification for work normally performed by the employee prior to any emergency orders, laws, or regulations issued due to the COVID-19 (coronavirus) pandemic.

If an employee is requested to perform any duties for an employer, the employee is not deemed a paid furloughed employee for any period of time they are performing duties for the employer. If the employee is not deemed a paid furloughed employee, payroll must be assigned to the classification applicable to the work being performed in accordance with Basic Manual Rule 1-A.

This Rule 2-F-3 is effective March 1, 2020. This rule will continue to remain in effect and will not expire until determined at a later date as circumstances warrant and in consultation with state regulatory authorities. A future filing will be made to establish an expiration date to this rule as determined and approved by the regulator.

G. Interchange of Labor

If an employee performs duties directly related to more than one properly assigned classification, per Rule 1-D-3, his or her payroll may be divided among properly assigned classifications provided that:

1.  The classifications can be properly assigned to the employer according to the rules of the classification system, and

2.  The employer maintains proper payroll records which show the actual payroll by classification for each employee.

a.  Records must document the actual time spent working within each job classification and an average hourly wage comparable to the wage rates for other employees within the employer’s industry.

b.  Estimated or percentage allocation of payroll is not permitted.

NOTE:  If payroll records do not document the actual payroll applicable to each classification, the entire payroll of the individual employee must be assigned to the highest rated classification that represents any part of his or her work.

3.  Payroll for holiday, vacation, sick pay, overtime, and all other forms of payroll that are not directly attributable to a specific classification code must be allocated to the classification code with the greatest amount of payroll applicable to the individual employee.

If none of the classification codes applicable to the employee have the greatest amount of payroll, the payroll for holiday, vacation, sick pay, overtime, and all other forms of payroll not directly attributable to a specific classification code must be allocated to the highest rated classification code applicable to the employee.

4.  Some employees qualify for division of payroll between two or more basic classification codes and also engage in operations that are standard exception classifications 8810, 8742, 8748, and/or 8871.  The payroll of these standard exception operations must be allocated to the basic classification code with the greatest amount of payroll applicable to that employee.

Exceptions to Rule 2-G:


Examples of instances of interchange of labor where an employee’s payroll may be divided between two or more classifications:

Note:

COVID-19 Pandemic - Assignment of Classification Code 8871-Clerical Telecommuter Employees for Temporary Change in Duties

Operations of a higher-rated classification that have been amended to clerical telecommuting due to the North Carolina governor-declared stay-at-home order qualify to be assigned to Classification Code 8871-Clerical Telecommuter Employees for the duration of the stay-at-home order. This provision shall apply while the operations perform duties consistent with Code 8871's definition, from when North Carolina's stay-at-home order took effect on March 30, 2020 and for up to 45 days after the stay-at-home order has been lifted. This provision shall not apply to operations that meet the definition of a classification code that includes Clerical Office Employees.

H. Subcontractors

1.  North Carolina workers compensation laws provide that a contractor is responsible for the payment of compensation benefits to employees of its uninsured subcontractors.  As such, the contractor must furnish satisfactory evidence to the carrier that the subcontractor has workers compensation insurance in force covering the work performed for the contractor.  The following documents may be used to provide satisfactory evidence:

2.  For each subcontractor not providing such evidence of workers compensation insurance, additional premium must be charged on the contractor’s policy for the uninsured subcontractor’s employees in accordance with Subcontractor Table 1 and 2 below:


Subcontractor Table 1

 

If the contractor has not furnished evidence of workers compensation insurance and…

Then to calculate the additional premium…

Furnishes complete payroll records of the subcontractor's employees…

Use the payroll detailed in the records.

Does not furnish complete payroll records and the subcontracted price does not reflect a definite payroll amount…

Use the full subcontracted price of the work performed during the policy period by the subcontractor as payroll.

Does not furnish complete payroll records, but documentation of a specific job discloses a definite amount of the subcontracted price represents payroll…

Use the payroll amount indicated by the documentation as the payroll, subject to the minimums in Subcontractor Table 2 below.

 

Subcontractor Table 2

 

If the job involves:

Then the minimum to calculate additional premium is:

Mobile equipment with operators (such as, but not limited to earth movers, graders, bulldozers or log skidders)…

Not less than 33 1/3% of the subcontracted price

Labor and material…

Not less than 50% of the subcontracted price

Labor only…

Not less than 90% of the subcontracted price

Piecework…

Not less than 100% of the subcontracted price (The entire amount paid to pieceworkers must be the payroll.)

 

3.  Vehicles with chauffeurs, drivers, helpers, or messengers entitled to benefits under workers compensation insurance law may be engaged under verbal or written contract.  The amount used to calculate the premium is determined in the following manner:

Subcontractor Table 3

 

If the owner of such vehicles has not furnished evidence of workers compensation insurance and…

Then…

Payroll can be obtained…

The total payroll of these drivers must be included as payroll of the insured employer that contracted for the vehicles.

Payroll cannot be obtained or the driver is an owner-operator and does not receive a set payroll…

1/3 of the total contract price for the vehicles must be included as payroll of the drivers.

The contract price does not include the cost of fuel, maintenance or other services provided to the owner or the owner-operator of a vehicle under contract...

The value of these goods and services must be added to the contract price before determining the 1/3 amount.

 

4.  In all cases, the classification applicable to payroll for subcontractors is based on the same classification that would have applied if the individuals were employees of the contractor.

5.  In all cases, if an experience modification has been established for the contractor, this experience modification must be applied to the premium developed for the uninsured subcontractor.

I. Voluntary Compensation Insurance

Premium is determined on the basis of the workers compensation rules, classifications, and rates in this manual if North Carolina is the designated workers compensation law in the schedule on the Voluntary Compensation and Employers Liability Coverage Endorsement (WC 00 03 11 A).

When Voluntary Compensation Insurance is provided for a group of employees, payroll records must be maintained separately by the insured for the designated group of employees.

For additional information, refer to Rule 5-C-1.

J. Volunteer Workers

To the extent coverage is provided for volunteer workers, premium is determined on the basis of payroll normally received by and assigned to the classification for non-volunteer employees doing same or similar work.

K. Migrant and Seasonal Agricultural Workers

To the extent coverage is provided for migrant and seasonal agricultural workers, premium is determined by the carrier based on its evaluation of the exposures presented by the risk.