How are general liability insurance premiums calculated?
Creating a small business insurance policy is a delicate balancing act. Your provider has to assess how much risk it is taking on by covering your business. And to make an accurate evaluation, they need to know more about your company, its operations, and where its potential vulnerabilities may lie.
Each of these factors influences the cost of your general liability insurance. Let's take a look at what these considerations tell your provider about your business and why they affect the price of your general liability policy.
Size and condition of your business premises
One of the primary functions of a general liability policy is to protect your business from the cost of premises liability claims. So it makes sense that the price of your coverage would be influenced by the size and physical condition of your office building or commercial location.
For example, larger premises mean more places where slip-and-fall injuries can happen (if your property is open to the public), which can raise your premium. As for the condition of your property, insurers examine the age of the construction and whether the building is up to code. Generally, newer construction lowers your liability rates, whereas older construction with a lack of accessibility can raise general liability rates.
Type of business operations / industry
When it comes to risks, not all businesses are created equal. For instance, construction businesses are usually considered high risk, whereas consultants are typically categorized as low risk. But even within these industries, each profession has its own spectrum of hazards and vulnerabilities. Typically, the higher your industry's risk profile, the higher your premium estimates will be.
Experience in your profession, field, or business
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 lower your premiums.
Number of employees
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 asses your risks accurately.
Location of your business
Your geographic location can affect your rates, too. For instance, urban areas may increase the likelihood of violent crime against customers on your premises. So if your business is in the city, you may pay more for general liability coverage. However, since the crime rates in suburban areas are lower, businesses located in these areas may have lower liability rates. High-traffic areas can also mean higher premiums because more people through your doors means more chances for possible injuries.
General liability insurance limits and deductibles
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 an umbrella liability insurance policy.) As for your deductible (the amount you pay before your insurance benefits kick in), remember that higher out-of-pocket spending will lower your monthly premium.
General liability policy features
Some insurance providers offer products designed specifically for businesses in your industry. These products can save you money because they cut out the frills and extra coverage that your profession doesn't use. But if your policy does have additional features, such as product liability insurance, your quote will usually reflect those additions. (Related post: What is product liability insurance?)
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 capacity. 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.
For more information on the cost of general liability insurance, check out our general liability insurance cost analysis.
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Most of the influences on your general liability insurance quote are outside your realm of control. However, it's good to keep these components in mind so that you know when to update your plan to reflect changes in your business.
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