Hi, I’m Gordon Coyle, and in this video and post, I’m going to explain how insurance companies arrive at the price you pay for general liability insurance. We’re going to dig into the general liability cost and how to save on this form of business insurance so you’re a more informed buyer.
So, let’s start with the basics, What is General Liability Insurance?
General Liability Insurance protects your business from claims which may arise from bodily injury, property damage, and personal injury.
Things like slips and falls can lead to lawsuits. If you want to learn more about the basics of what this policy covers titled: General Liability Insurance – Explained in 10 Minutes
General Liability can be purchased as a stand-alone policy or it can be bundled with other coverages like property insurance in a package policy or business owners policy which is commonly how businesses purchase liability protection.
The price you’ll pay for general liability is unique to your business.
Here are the main rating factors that will determine your General Liability cost:
- The industry you’re in – for example, if you own a professional services firm your rates will be lower than if you own a contracting business. The more hazardous your industry, meaning the potential for claims to arise, the more you’ll pay.
- Geography – where your business is located and where it operates will also have a big impact on your liability rates. As an example, say you’re a roofer contractor, you will pay a lot less in a rural community in Texas than you would if you were located in a suburb of New York City. This has a lot to do with litigation trends, and typical settlement amounts in claims which can differ dramatically in different areas of the country or state.
- Your claims history – this is a big one. If you’ve ever gone out for quotes on your business insurance agents will ask for your loss runs. A loss run is a record of your claims over the past 5 years and underwriters will want to see this history so they can properly incorporate it into their pricing. Have more claims than your peer group and you’ll pay more for insurance or may even find it difficult to obtain. Have fewer claims than your peer group and you’ll earn credits and pay less.
- Your experience level in this business also plays a factor in the cost of general liability insurance. If you’re a startup business with no prior experience in running this type of business you’ll pay more and even find it more difficult to get insurance, than if you had years of experience.
Why is that?
Because insurance underwriters want to know that you have experience in running a business safely.
They don’t want to be paying out claims for an inexperienced company that doesn’t know how to control risk and safety.
Now, those are many of the issues in how insurance companies develop rates for liability insurance.
Once the rate is calculated it’s then multiplied by something called a rating basis and this is where it gets really specific to you and every insured.
The rating basis for General Liability Cost will be one of the following:
- Payroll – which is often used for contractors.
- Gross Sales – often used for wholesalers, manufacturers, and some retailers
- Area – meaning square footage of an office or store – used for professional offices and some retailers
- Units – this is an oddball rating basis and can be things like the number of condo units or apartment units for habitational real estate accounts.
General Liability policies have an audit feature at the end of every policy year to “true-up” your exposures.
You start the year based on an estimate of sales or payroll and the year-end audit will determine your actual exposure.
Have more payroll or sales than the beginning estimate and you’ll pay an additional premium – have less than the estimate and you’ll get a refund. Your full-year costs are based on the actual full-year payroll or sales.
Here’s an insider tip – If you’re getting quotes from other agents to compare against what you paying, keep a close eye on what amount of sales, payroll, or units are being used in any proposal you considering.
Too often, I’ve seen competing brokers lowball the rating basis, meaning they reduce sales and the premium is lower and the client jumps on it – only to find out 13 months later at audit time that they owe a big additional premium to cover that difference.
It’s a stupid move by some brokers so just be careful.
Okay, you’re probably also thinking, you’ve explained how premiums are developed – how do i save money or reduce my costs on general liability insurance, so here are a few tips:
- Work with an independent agent or broker who you can trust. – an independent agent is one that represents multiple insurance companies so they can shop around for the best quote for you and make expert recommendations for you.
They do the leg work so you don’t have to. This means online sellers like Next or Progressive usually only quote their own policy so you’re not getting any choices or the best choices.
- Be prepared when you engage that independent agent – have your sales and payroll estimates ready, have your current policies available for review, and have current loss runs ready.
Also, be prepared for feedback from that agent or broker – they may have recommendations for coverage improvements or strategies that will help you in the long run
- In addition to the basic information about your insurance – if you have a written safety program or safety meetings or other safety and risk control documents that are used in your firm to help control risk – have those ready as well.
This is a step often overlooked by insurance brokers and what it does – is give insurance company underwriters who will determine the premiums you pay – a reason to give you as much credit as they can for having good controls in place.
- Finally, don’t skimp on your rating exposures thinking this will save you money. I mentioned earlier the rating basis is often payroll or sales, if you undercut or skimp on these exposures you’re doing yourself a disservice.
Why? Two reasons – first you’ll only pay that difference at audit time, and second, the bigger your firm is, the greater potential there is for discounts based on size.
So that’s my take on general liability insurance costs – what goes into the rates you pay and how to help control those costs.
Have other questions I didn’t answer here? Drop me an email, give me a call, or you can actually book an appointment on my calendar.