Although it adds to the cost of running a business, general liability insurance is not something I recommend skipping out on. It protects against risks that could force a company into bankruptcy or serious financial hardship, such as bodily injury, property damage, and personal and advertising injuries.
With that said, policies of this type can be affordable. You just have to understand what insurers factor in when calculating your general liability premium. It ultimately boils down to things like your level of risk, the likelihood of a claim being filed, and the dollar amount of your coverage or potential claim amount. By understanding how general liability premiums are calculated, you can save money, especially when shopping for a general liability insurance company.
Factors impacting a general liability premium
Profitability is, of course, a huge deal at the end of the day, so insurance companies have vast amounts of data and statistical models to determine how much to charge based on your specific company’s risk factors and likelihood of paying out a claim.
In determining this level of risk, insurance companies consider the following factors that ultimately impact your general liability premium:
- Class code
- Payroll
- Business size and revenue
- Business location and premises
- Industry experience
- Claims history
- Policy coverage details
While insurance companies typically consider the same factors, they may price policies differently depending on their overall appetite for risk. For example, an insurer that does not have a big appetite for risk for businesses in the agricultural line of work may charge agri-businesses a high premium across the board. That way, they limit the volume of clients from that line of business.
To find one that fits your need and budget, check our guide to the cheapest general liability companies.
Class code
A class code is essentially an identifier for what line of work your business operates in. This is important for insurance companies because different industries are exposed to unique types of risk. A class code starts with your general line of work and has subclassifications for specific businesses within that industry.
Insurance companies can use class codes in common databases like the Insurance Service’s Office (ISO) or the North American Industry Classification System (NAICS). Examples of codes for certain industries with the ISO are as follows:
- 10000-19999: Mercantile
- 40000-49999: Miscellaneous
- 50000-59999: Manufacturing or processing
- 60000-69999: Building or premises
- 90000-99999: Contracting or servicing
Other classification systems include the National Council on Compensation Insurance (NCCI) and the Standard Industrial Classifications (SIC), which you can learn more about in our guide on general liability class codes.
Payroll
Your classification code serves as the starting point for determining your general liability premium rate, otherwise known as the premium basis or exposure basis. Your payroll is then taken into consideration, and is typically based on a value per $1,000 of payroll, gross sales, or other similar metric.
As a general rule of thumb, the larger your payroll is, the greater your general liability premium will be because that’s generally tied to a company that does business with more customers. And with more customers, comes more exposure, and a greater likelihood of an accident occurring.
Business size and revenue
The larger your company, the more interactions it will have with customers, and the more exposure it will have to risky situations. As a result, your general liability premium will generally be higher.
Put simply: a sole proprietor that has just a small handful of employees won’t be dealing with as many clients or work on as many jobs compared to a large corporation with thousands of employees nationwide. There’s also the issue that larger companies tend to be easier targets for fraudulent claims, making it potentially more costly for an insurance company to provide coverage or defend against the claim.
For your business size, insurance companies will consider how much business you do and how large your customer base is. This could include the number of individuals you employ, where your customers are located, the number of physical locations your company has and where they’re located, and your gross sales or company revenue.
Business location and premises
Certain characteristics of your company’s physical locations can impact your general liability premium. Insurance companies can consider the building’s location, size, how much foot traffic it’s expected to receive, and its hours of operation. These can all impact general liability insurance costs because they are items that speak to the likelihood of a claim being filed.
For example, every business location could be at risk of customers getting injured from something like a slip-and-fall accident. However, a large building that’s open 24/7 is statistically more likely to have these types of incidents, versus a small building that’s only open 8 hours per day, all other things being equal.
Other characteristics of the building premises can also delve into the nature of the business or equipment that’s on location. For example, automatic car washes have the potential to damage someone’s vehicle. That’s something that insurers could take into account when determining how much to charge for your general liability premium.
Industry experience
General liability premiums tend to be higher for newer companies and those with less experience because they are less likely to have the insight on how to avoid risky scenarios that might lead to claims. From a practical standpoint, it’s easy to see how this could play out. A brand new automatic car wash company might not have the foresight to caution customers about how to prevent damage to their vehicles, leading to accidental damage to property. Similarly, the business might not yet have had time to iron out checklists or procedures to reduce the likelihood of mistakes by employees that might subsequently lead to damage to customer property.
Companies with several years of experience, on the other hand, are more likely to have the expertise in eliminating rookie mistakes. They are far more likely to have established procedures, processes for training staff, reliable equipment, and other characteristics to minimize the likelihood of incurring liability and needing to file a claim.
Claims history
This one’s pretty simple. The more claims you’ve filed, the riskier you’ll appear to insurance companies, and the more you’ll end up paying for general liability insurance. The idea here is that if you’ve filed a lot of claims in the past, an insurance company may expect that trend to continue in the future, and price your policy accordingly.
Policy coverage details
Policy details can include things like your coverage limits, the amount of your deductibles, and endorsements to cover additional scenarios. Higher limits typically mean higher premiums because the insurance company is on the hook for potentially paying out a higher dollar amount in the event of a claim. Conversely, higher deductibles are typically correlated with lower premiums because you’ll be expected to pay out more before the insurance has to kick in any money for a claim.
General liability policies may also have the option of additional insurance endorsements to cover additional risk factors or scenarios that may be unique to your business.
How to save money on business insurance
While industry classifications remain the same across insurers, that doesn’t mean your business is stuck paying the same premium for general liability regardless of the company. There are several ways to save money on business insurance:
- Shop around: While it is true that insurance companies will use a lot of the same categories when determining general liability premiums, they also have their own appetite and proprietary formula. The best way to save money is to compare providers through a digital marketplace or broker. For instance, at one point, we researched quotes and found that a retail store in Alabama received a quote for $90 monthly for general liability from a carrier but $21 a month for the same coverage through digital broker Simply Business; you can learn more about the broker through our review of Simply Business.
- Manage limits: A small business with low revenue doesn’t need as high a limit as a larger, riskier, or more established company. Limits can be scaled with the business as it grows.
- Bundle coverage: If you need general liability insurance, odds are your business also needs property insurance. A business owner’s policy (BOP) is a common policy bundle that includes general liability, commercial property and, usually, lost business income coverage. Most insurers offer this at a rate that is discounted than if you purchased each policy separately. We have a comparison of BOP vs general liability if you’d like to learn more.
Frequently asked questions (FAQs)
If your business has recently had an at-fault claim, then this will likely impact your premium. The best thing to do is to maintain a safe business environment to maintain a period of no claims. Some insurance companies will work with risk management and site assessment in exchange for a lower premium.
The costs of general liability depend on the industry. Swim instructors may pay anywhere from $200 to $600 annually, whereas an electrician may pay $700 to $1,500 annually.
No, the class codes for workers’ compensation are different from that of general liability. General liability is targeted toward the risk of the industry leading to a claim for a third party, whereas workers’ compensation evaluates the hazards the employees face.
Bottom line
While you will be unable to estimate your general liability premium, you can get a good idea of the costs that affect it. Understanding why something affects costs helps you better manage risk in your business to reduce liabilities and, thus, the premium. All calculations start with the class code and then factor things like location, revenues, and claims history. Use this information to help you find the cheapest general liability insurer that fits your needs.
