How Insurers Calculate Commercial General Liability Insurance Rates
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Small business owners realize that they may face litigation from customers or rival companies. Ten years ago, the U.S. Small Business Association found that these lawsuits cost owners precious time and revenues. For some smaller firms, it caused both emotional and economic hardship. One way that companies can protect themselves against these suits is by purchasing Commercial General Liability Insurance. But do insurers calculate premium rates, and what can small businesses do to get the lowest rates? In this article, you'll learn how underwriters determine rates for CGL policies.
What Is Commercial General Liability Insurance?
Insurers consider CGL as one of the most critical coverages that businesses can purchase to protect themselves. Many business owners frequently face liability suits from their customers or others. They can significantly affect their profits and assets because it costs a lot of money to fight these claims in court. CGL policies will cover the cost of legal defenses and pay for any damages on the company's behalf if courts find a business liable. Commercial General Liability Coverage protects businesses from financial losses they may incur because of injuries caused by their products and services. It includes advertising injuries, bodily injuries,and property damages caused by business operations and employees. It also covers non-professional acts of negligence.
According to the Insurance Information Institute, you can purchase commercial general liability insurance as part of a stand-alone policy, as part of a Business Owners Policy (BOP), or Commercial Package Policy (CPP). CGL insurance is comprehensive business insurance. However, it doesn't cover all the situations and risks that a business may have. If you're CGL doesn't provide your business with enough coverage, you may purchase a commercial excess (umbrella policy) that provides additional liability coverage.
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What Are CGL Policies?
CGL policies offer different levels of coverage for businesses. Some offer premises coverage that protects companies from claims that take place at the company's physical locations during their regular hours of operations. This insurance falls under two categories:
Claims-based: These policies cover events regardless of when the situation took place.
Occurrence-based: This coverage only pays for events that take place during a specific period.
There are several situations where your commercial general liability insurance can protect your business, including covering medical costs and attorney fees. It can also pay off punitive and compensatory damages. The Insurance Services Office (ISO) publishes general liability policies on standard forms. It's more convenient for insurance companies to do this. Additionally, it helps them to avoid risks when courts can interpret the wording differently than intended. It prevents the insurance company from paying claims they never intended to cover.
What Type of Protection Does Commercial General Liability Provide?
CGL insurance can protect companies in the following scenarios:
Bodily injuries - They are physical injuries that your company may have caused. These can include slips and falls, employee accidents. For example, it will cover you if a person suffers a broken wrist during a slip and falls on a wet floor.
Property damages - These are damages that your employees may commit against another person's property. For instance, it may cover damage that your employee causes to a client's home if they accidentally break one of their windows.
Advertising injuries - They are damages that your business causes to your customers. For instance, your customers file a class action lawsuit against your business alleging your advertisements have made misleading information about your products and services.
Reputational harm you may have caused damage to another company in an interview. For instance, if you made a statement about another business that isn't true and harms their business reputation.
Copyright infringement – These are violations that your business commits by using another company's branding, advertisements, or intellectual property, without their permission.
Categories of Commercial General Liability Coverage
Insurance companies usually offer three types general liability insurance for businesses:
Coverage A – Bodily Injury and Property Damage Liability
Coverage B – Personal and Advertising Injury Liability
Coverage C – Medical Payments
Coverage A: Bodily Injury and Property Damage Liability
According to the Insurance Information Institute, this coverage protects insured businesses against legal liability when a third party suffers bodily injury or property damage arising from non-professional negligent acts or liability on the business premises or as a result of business operations. Bodily injuries mean injury, illnesses, diseases, or death. Some states consider mental and emotional distress as injuries, even when there is no physical harm present. They can include post-traumatic stress and humiliation.
Coverage A is broad and covers any many types of bodily injuries and property damage caused by covered occurrences. It also includes products-completed coverage that pays for bodily injuries or property damage when completed jobs are defective.
For example, a fictional couple James and Jenna Harrington hire a private contractor, Brownwood Construction, to build a new deck. Workers quickly finish the project, but it has a shoddy, faulty foundation. Two weeks later, Harringtons host an outdoor mixer on their deck, when it suddenly collapses. The owner and their friends suffer many broken bones and other injuries. The Harringtons sue Brownwood Construction, who turns to their general liability insurance to pay off their claim.
What Does Coverage A Exclude?
This coverage excludes workers' compensation and employment liability insurance. Companies can purchase this coverage as a separate endorsement. Additionally, it excludes pollution liability insurance, but businesses can buy this as a standalone policy. CGL excludes situations that involve liquor and professional liability. An insurance agent can help you find the best coverage for your business.
If a lawsuit judgment filed against your company falls under Coverage A, your insurance company will hire an attorney to defend your case. They will cover the fees for your attorneys, courtroom costs, some bond premiums, and any interest charged on the judgment. It will pay all fees up to the policy's coverage limits.
Coverage B: Personal and Advertising Injury Liability
Coverage B provides a narrower scope of Coverage than Coverage A. It pays for personal and advertising injury liability protects an insured company against claims arising out of certain offenses. Personal and advertising injuries include slander, libel, and defamatory statements. It may also include disparaging materials, publications and vocal pronouncements that violate an individual's right to privacy. It also includes copyright and privacy infringement in advertisements, wrongful entry or evictions, invasion of the right of private occupancy, and false arrest or wrongful detention.
Here is a full list of situations that Coverage B may address.
Libel and slander
Infringing on another person's copyright
Using other company's advertising ideas and branding
Wrongful eviction and entry
Invasion of privacy
These insured acts fall under intentional torts, or deliberate acts that cause physical, psychological, and financial damages.
Coverage C: Medical Payments
This coverage pays for events where third-parties claim your business was negligent and sues for damages that arose from those situations. It also provides limited medical payments. These include injuries that non-employees sustain on the property because of an accident that takes place on an insured company's premises. Non-legal events can also trigger this coverage. Medical Payments coverage offers a quick settlement for small medical claims without turning to the litigation process.
Coverage C also pays for medical, surgical, ambulance, hospital, professional nursing and funeral expenses when a person suffers injuries or dies during an accident that takes place on the premises of an insured company. Unlike Parts A and B, there is no defense or legal liability coverage since insurers provide this coverage on a no-fault basis. People are less likely to sue if they receive quick medical payments to cover the costs of any injuries they have sustained at your business.
What's Not Covered by a General Liability Insurance Policy?
Although general liability offers coverage for a wide range of situations, it does not cover the following situations which require specialized policies.
Illegal acts of wrongdoing by your employees
Damages to Your Own Property: Commercial property insurance policy helps protect your owned or rented buildings and business equipment.
Damages to Customer Property in Your Possession
Errors in professional services: Professional liability insurance can cover your legal costs if your customer sues for a mistake in the services your business provided.
Employee Injuries and illnesses resulting from work: Workers compensation insurance offers employee benefits to help them recover from job site injuries and illnesses.
Claims that exceed your policy limits: A commercial umbrella insurance policy can help cover more expensive claims.
Car accidents your employees caused while driving: Your business can use commercial auto insurance policies to cover any damage.
Excess Liability Coverage (Umbrella Policies)
Your business may want to purchase additional liability coverage for your business. Speak with an insurance agent to learn which coverage your company may need.
Here are three additional policies to consider:
Liquor Liability: This insurance protects your business against losses caused when a patron of your business becomes intoxicated and harms others. It also covers companies that manufacture, sell, serve, and facilitate the use or purchase of alcohol. Insurers sell this coverage as riders on commercial general liability coverage or stand-alone policies.
Directors and Officers liability: These protect past and future directors and officers from damages resulting from alleged wrongful acts they committed in their position. It also protects them from alleged errors, misstatements, omissions, and breaches of duty.
Pollution liability: This covers industrial, commercial, and agricultural property owners, managers, and developers with broad pollution liability protection. It includes first-party and third-party environmental liabilities. It includes sudden and accidental situations.
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How Do Underwriters Determine Your General Liability Insurance Premium Rates?
After you submit an insurance application, the insurance company will assign an underwriter to assess your company's risk of future claims. The underwriter will evaluate your operations to see if it is subject to any potential losses. Your insurer will determine if your business meets its underwriting standards once the assessment process finishes. Insurers use different metrics when reviewing CGL insurance applications. They include objective and subjective factors. Some include your experience rating worksheets, claims history, and motor vehicle report. They may also base your evaluation upon data they gather from inspection reports about your premises. Property Underwriters may consider the construction, occupancy, protection, and exposure (COPE) of your buildings. Auto underwriters determine the potential for your vehicles to get into accidents. Here are some factors that an underwriter may use when determining whether you're a suitable candidate for coverage:
Your business location
Annual sales and revenues generated by your company
The number of years you've operated
Number of customers
Your history of losses and claims
Business organization (sole proprietorship, corporation, etc.)
Your previous insurance company
Application history, whether an insurer has canceled, declined, or non-renewed your policies within the past three years.
Whether your previous officers received criminal charges or convictions (bribery, arson, or fraud).
Your history of uncorrected safety code violations
General liability coverage can cost from $500 to $600, depending on your risk exposure. They can also vary depending on your industry.
How to Lower Your Liability Risk
Your company can do several things to reduce your company's risk of losses. Following these steps will encourage insurance underwriters to approve your application and also lower your premium rates. You can implement a safety plan at your company to educate workers about different hazards at your organization and encourage your workers to follow these plans. Contact your insurance company to learn how to set one up.
You can contact your insurance company's risk control representative. You can invite them to visit your business to offer suggestions about reducing accidents and other associated risks. Once they complete their assessment, take their advice to heart and make the necessary changes to keep your premises safe. Additionally, you can ensure that your business follows all applicable OSHA guidelines for small businesses. The federal agency will conduct safety inspections of your business. The National Institute for Occupational Safety and Health (NIOSH) can also conduct free health hazards presentations on your premises.
Next, your company should investigate your previous claims. Read these claim reports and assess what your company could have done to avoid these risks. Research ways you can avoid similar accidents or claims. For instance, if an employee at your warehouse company accidentally falls from a mezzanine and injures themselves, you can purchase fall protection, guardrails and hazard signs to prevent similar accidents from occurring in the future.
How to Calculate How Much CGL Coverage You'll Need for Your Business
Step One: Contact your state's insurance regulator and ask if they require CGL and other policies for your business. Ask them about the amount of coverage you'll need. For instance, some commercial trucking companies must buy CGL policies that cost as much as $750,000. But normally, a policy will not cost anywhere near that.
Step Two: Write down basic statistics about your company's operations, including how long you've operated, the number of employees, revenues and size of your company's facility. You can apply the above checklist that underwriters typically use to determine your quote.
Step Three: Speak with your local insurance company to find out their rates for your business. You can use their rates to calculate a quote. Multiply your insurance rates by the size or revenues of your company. For instance, if your quote is for ten percent, multiple your gross revenues by 0.15 to calculate your costs. If your insurer gives you a quote of $50 per square foot, multiply $50 by the area of your office space in square feet.
Step Four: A much simpler option is to find a premium quote for your company is to use SmartFinancial's transparent technology. Just complete the form on our page, and we'll connect you with insurance companies within your area. You can compare rates and select the coverage that's right for your business.
Are you searching for great general liability insurance coverage for your business? Smart Financial can help. You can use our transparent insurance technology to search for the right coverage for your company. Just fill out our quick form, and we'll provide you with multiple quotes from local insurance companies within your area. You can compare coverage, prices, and determine which one is right for you. Smart Financial is the quick, simple way to buy insurance.