How are general liability insurance premiums calculated?

Creating a small business insurance policy is a delicate balancing act. Insurance companies assess how much risk they’re taking on by covering your business. They need to know more about your company, its operations, and where its potential vulnerabilities are.

Each of these factors influences the cost of commercial general liability (CGL) insurance for business owners. Let's take a look at what these considerations tell your provider about your business and why they affect the cost of your general liability policy.

One of the primary functions of general liability insurance is to protect your business from the cost of premises liability claims. The price of your insurance coverage is influenced by the size and physical condition of your office building or business location.

Larger premises mean more places where third-party bodily injuries or property damage can happen (if your property is open to the public), which could raise your premium. Insurers will also examine the age of the building and whether it’s up to code. Generally, newer construction lowers your liability rates, whereas older construction with a lack of accessibility can raise general liability rates because it’s considered a higher risk.

An insurance agent uses general liability class codes to classify small businesses according to their overall risks. For insurance underwriting, these codes will group small businesses with those that perform similar work and face the same types of hazards.

This allows insurers to analyze claims within similar fields and locations to determine the level of claims and their costs within each code group.

Your class code will be compared to other factors such as the size of your payroll, your gross sales, and the size and type of buildings you own or lease, to help determine your insurance needs and your insurance rates.

Keep in mind that your class code can also be used to reject claims in areas outside of your normal business operations.

For example, if you ran a catering business and expanded to running a restaurant or food carts, these changes would likely be outside of your class code and not covered under your general liability insurance. Your insurer would want to know about these changes in advance and would likely change your class code and premiums accordingly.

When it comes to risk, not all businesses are created equal. For instance, construction businesses are usually considered high risk because of their increased rate of injuries and property claims. Professional services and consultants are typically categorized as low risk.

Even within these industries, each profession has its own hazards and vulnerabilities. Typically, the higher your industry's risk profile, the higher your premium will be.

For independent contractors, their general liability premiums would also be set according to their type of business. Some businesses require their contractors to have general liability insurance. Some states also require contractors to carry general liability coverage, in fields such as construction.

To see insurance costs for businesses in your industry, visit our industry-specific cost analyses.

While industry is the biggest factor in the cost of your general liability policy, your sales revenue also plays a large part. Especially in relation to the industry your business operates in. Typically, the higher the revenue, the higher your premium. However, the cost increase is also dependent on industry. Some industries only increase modestly with more sales, while others experience large increases due to a surge in risky activity.

Say your IT consulting firm has a revenue spike, your premiums may only increase marginally since office-based businesses don't face an increase in third-party bodily injuries or property damage due to more sales.

Conversely, insurance premiums for construction businesses, like a commercial builder, are very sensitive to revenue increases. The more a commercial builder makes, the more they build, the more exposure to on-the-job risks, meaning higher insurance costs.

Don't be surprised if your insurance application asks about your years of business experience and your company officers' professional expertise. Your business's longevity and financial stability can affect your premiums.

The more employees you have, the more chances that they could accidentally damage someone else's property (a risk that general liability covers). Say, for example, an employee spills coffee on a client's laptop. That client could sue your company for replacement or repair costs.

That's why your premium will typically be higher if you have more employees. Your application will likely request a breakdown of full- and part-time employees, as well as the number of subcontractors or consultants you employ so your provider can assess your risks accurately.

Your physical location can affect your rates too. For instance, small businesses in areas with high crime rates may pay more for general liability coverage. A company located in an area with less crime will likely have lower liability rates.

High-traffic areas can also lead to higher premiums. More people through your doors means more chances for injuries.

A previous claim doesn't necessarily mean your general liability premium will be higher, but there is a good chance it will influence your quote in some way. Ultimately, your provider and the nature of the loss will determine the extent of the impact. Many carriers evaluate claim histories on a case-by-case basis.

Many factors that affect your general liability insurance quotes are outside your control. However, there are steps you can take to reduce your general liability insurance premium.

You also need to be aware of when you may need to switch your policy or obtain a different type of business insurance.

The above factors are generally outside of your control, but you can choose how much you pay for insurance by carefully selecting your limits and deductibles.

Your general liability policy has a per-occurrence limit, which is the most your insurer will pay for a single claim, and an aggregate limit, which is the maximum it will pay for claims during the policy period (usually one year). The higher your coverage limits, the more your policy will cost.

You can keep your general liability limits reasonable and draw on extra coverage when you need it by purchasing commercial umbrella insurance policy, which boosts your limits across several policies.

As for your deductible, remember that higher out-of-pocket spending will lower your monthly premium. However, make sure you choose a deductible you can easily afford so you can benefit from your insurance when you need it.

Some insurance providers offer policies designed specifically for businesses in your industry. These policies can save you money because they cut out the frills and extra coverage that your profession doesn't use.

Read the text of your policy carefully to see what it covers, exclusions, as well as any endorsements that modify coverage. If your policy does have additional features, such as product liability insurance, your quote will usually reflect those additions.

One way to save money on your general liability insurance is to purchase a business owner’s policy (BOP), which combines general liability insurance policy with commercial property insurance under one policy.

Most small businesses need both coverages, and combining them typically costs less than if they were purchased separately.

During a premium audit, your insurance company examines your business’s financial records to make sure your coverage and premium accurately reflect your insurance coverage and risk exposure.

Audits are typically done at the end of a policy period, or when you cancel a policy. New businesses and small business owners often rely on estimates for their financial projections, and small businesses can change rapidly over time, so the audit is a chance to make sure your insurance coverage and premiums accurately reflect your level of risk.

Complete Insureon’s easy online application today to compare quotes for general liability insurance from top-rated U.S. insurance companies. Once you find the right policy for your small business, you can begin coverage in less than 24 hours.