Why is commercial insurance so expensive?

If your job requires you or your employees to operate heavy machinery or handle hazardous materials, you’re at higher risk of accidents, workplace injuries, and property damage. These incidents can cause you to face higher and more frequent liability claims from employees and customers.

For example:

• Construction businesses operate on project sites filled with heavy machinery and other potential hazards, upping the chances of an employee getting hurt or a customer’s property getting damaged.
• From dangerous machinery and potentially hazardous materials to selling defective products, manufacturing plants present many opportunities for workplace injury and customer bodily injury claims.
• For delivery services, trucking companies, and other transportation businesses, having employees spend most of their time on the road increases their risk for auto accidents, which can result in pricey commercial car insurance liability claims.
• With constant foot traffic, equipment that can cause fires, and the chance of serving contaminated food that causes foodborne illnesses, restaurants’ risk for accidents and injury runs high.
• Businesses that require specialized equipment, such as auto repair shops that work on exotic or classic cars, may require customized coverage, which can bump up the cost.

Where your business is located has a strong impact on your rates. If your business is located in a higher-risk area, you have an increased chance of filing a claim, which can drive up the cost of your insurance premiums.

Some of these geographical factors that can affect your cost include:

• Areas with higher population density, which typically increase the chances of accidents and crime, including theft, vandalism, and property damage
• Properties near coastal regions, with the increased flood risk
• Regions prone to natural disasters, such as hailstorms and hurricanes
• Your proximity to emergency services, such as fire hydrants and fire stations
• Your compliance with local building codes and regulations

The bigger the company, the greater your chances are for accidents, theft, property damage, and other liabilities. For example:

• Having more employees means there’s an increased chance for workplace injuries and employee incidents, resulting in a higher number of workers’ compensation claims and employment practices liability insurance (EPLI) claims, such as wrongful termination lawsuits.
• Making higher revenue equals greater financial loss during a business interruption, calling for bigger claim payouts.
• Having a larger number of valuable assets can lead to greater payout claims.

Claims and settlement payouts have been on the rise, primarily due to these factors:

Climate change: The increased frequency and intensity of storms, floods, wildfires, and other natural disasters.

Inflation: Healthcare costs are soaring, including prescriptions, treatments, and hospital care. Also, property expenses are climbing, including construction materials, specialized auto parts, and labor costs, making repair and rebuilding pricey.

Social inflation: Nuclear verdicts are becoming more common, with juries awarding larger sums for settlements, sometimes into the multi-millions.

With global inflation boosting the cost of goods and services, certain industries are facing issues that are impacting their claims, including:

• The rising cost of steel, lumber, and other construction materials has led to an increased cost in construction coverage, such as rebuilding a burned-down warehouse.
• Labor shortages and increased wages have led to higher service costs for repairing or rebuilding damaged property, such as a vandalized retail store.
• Supply chain disruptions have created shortages in materials and components, including parts required to repair tow trucks and landscaping equipment.
• Medical expenses and workers’ wages are increasing, inflating the costs tied to claims for workplace injuries and illnesses. For example, an employee slips and falls on the floor of your coffee shop.

In addition to premiums, inflation also significantly affects replacement cost valuations. For small businesses, this can lead to being underinsured, since their original policy limits may no longer cover the current cost to rebuild, replace, or repair damaged or stolen property.

For example, if an employee slips and falls at a coffee shop, the business could be responsible for covering the ambulance ride, medical care, and any necessary follow-up appointments. These costs are increasing and can place a significant financial burden on the business.

In most states, if your small business owns one or more vehicles for business purposes, commercial auto insurance is required. Costs for this coverage largely depend on the type and number of vehicles you own, and how they’re being used.

However, across the board, commercial auto policy premiums are going up. So, why is business auto insurance so expensive?

There are several factors, including:

• Increased cost of business vehicle repairs from advancing technology, raising the price of parts, to global supply chain issues causing parts shortages
• Auto accidents are on the rise, typically from distracted drivers looking at their smartphones instead of the road
• Rising medical costs, including urgent care visits and prescription drugs, are dialing up bodily injury claims costs

As cyberattacks, such as ransomware and phishing scams, happen more often and get more sophisticated, small businesses are a popular target for a few reasons:

• Many small business owners assume that hackers are only interested in larger corporations, failing to invest in the proper security protocols.
• More small businesses are offering remote-working policies, meaning more employees are conducting work on less secure networks.
• Bring your own device (BYOD) policies allow employees to work on personal devices, which are often less secure than corporate-issued equipment.

On top of these factors, the damages and regulatory fines from data breaches, cyber extortion, and other cybercrimes are getting more expensive, with the average cyberattack costing a small business between $120,000 and $1.24 million.

Because of this, insurance companies are introducing stricter requirements, including cyber insurance audits, and increasing premiums for cyber insurance to account for larger claim costs.

Depending on the type of industry you’re in, what kinds of work you do, and where your business is located, excess liability insurance can be crucial for your protection. This secondary coverage comes in to help if a claim exceeds your underlying liability policy’s limit.

Here are a few reasons why you may see higher premiums for excess liability coverage:

• Nuclear verdicts and increasing settlement amounts, sometimes in the multi-millions, are causing businesses to proactively seek higher coverage limits.
• Industries including construction, trucking, and hospitality face higher risks for workplace injury, property damage, and other liability claims.
• Commercial umbrella policies offer broader coverage across multiple underlying policies, compared to excess liability policies, which cover one underlying policy. As claims increase, so do umbrella premiums.
• Companies with a lengthy claims history or that are prone to more expensive settlements could face higher premiums and stricter underwriting requirements.

If your company has one or more employees, most states require you to have workers’ compensation insurance. This coverage helps pay for claims when an employee suffers a work-related injury or illness, including medical expenses, disability benefits, lawsuits, and compensation for fatal injuries.

Several factors could cause your workers’ comp costs to go up, such as:

• Labor shortages are exposing overworked or inexperienced employees to more chances for injury.
• Inflation is driving up wages, which in turn causes costlier workers’ comp claims to cover those wages while an employee recovers.
• Hiring contractors or gig workers can add a level of uncertainty around liability and compliance regulations. For example, misclassifying an employee can lead to significant penalties and premium increases.

With the steady rise in medical costs, including hospital visits, preventive care, and medication, employers are also seeing a spike in employee-related healthcare benefits costs.

Investing in risk management protocols can help keep claims down, thus reducing your premiums. This can include programs, training, and safety reviews that help mitigate incidents and demonstrate your insurance provider's commitment to reducing risk.

Here are some ways to ramp up your risk management process:

• Providing regular employee training to educate them on safety protocols, social media policies, equipment and materials training, and other company policies.
• Scheduling annual general liability insurance audits to ensure that you’re not underinsured, and to determine whether adjustments to your premiums or policy limits are needed.
• Conducting routine cybersecurity audits to ensure your company's systems are secure and have the most up-to-date software and features.
• Implementing fleet monitoring practices, such as GPS tracking, to encourage driver safety, reduce theft, make it easier to track down stolen vehicles, and offer maintenance oversight, resulting in fewer accidents and claims.
• Creating a safe workplace for customers and employees to reduce the chance of injuries, such as quickly cleaning up spills, removing clutter from walkways, installing handrails on stairs, and removing tripping hazards.
• Annually reviewing your policies to provide a gut-check on your coverage, ensuring that your existing insurance still meets your business’s needs.