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8 Factors That Affect Your Business Liability Insurance Cost


business liability insurance cost

Some products are very easy to determine a cost for.  Peanut butter and jelly sandwich?  Add the cost of each of the ingredients to the cost of marketing and fixed costs like the rent and utilities at the café and you’ve got a pretty simple idea of what the cost is.  Add the percentage of profit the business owner wants to make and now you have the sales price.  Unfortunately, the cost of your insurance isn’t nearly as simple to determine.  In fact, many insurance companies invest in very expensive software systems and hire very educated mathematicians, called actuaries, to determine how much they should charge for insurance coverage.  So what factors are the most impactful when it comes to your Business Liability Insurance Cost?  We’ll start with the ones you can’t control and finish up with the ones you most certainly can.


 What You Do

business liability insurance cost

One of the biggest factors in determing a price for your insurance coverage is the type of business you are in or what your organization does on a daily basis.  I’m sure you would agree that it should be more expensive to insure a demolition company than someone who fixes computers for a living.  Obviously, this is an extreme example.  And coincidentally, what constitutes a high risk business might surprise you.  From our example, if an insurance company is determining the price for each company’s cyber liability coverage, the computer repair person might have to pay a higher rate than the demolition company for that corporate insurance solution.  This is an example of how the type of insurance you purchase can affect this process.  See further below for information on that.

The other reason the type of work you do is important is because there are probably a lot of other organizations in the world that do something similar.  Because of that, insurance companies look at trends from those other organizations and may include higher or lower prices based on your competitors’ experience.  For instance, if the number of claims involving our computer repairman’s improper work is on the rise, the insurer will  adjust their prices accordingly for all computer repair people .  It’s nothing personal, they’re just trying to protect themselves from underpricing a whole group of policies and potentially lose a lot of money on them. 

 How Much Activity You Have

business liability insurance cost

You’ve done a fantastic job growing your business or organization.  In fact, you’ve doubled your revenues in the past 12 months.  Congratulations.  Then your insurance renewal comes in and you’re going to have to pay 40% more for you premiums this next year.  No good deed goes unpunished?  Not quite.  Chances are that the more business you do, the more clients you service, or the more widgets you ship…the more likely it is that you will experience some type of claim.  It’s like playing a game of jenga.  You might be the World Champion of Jenga playing but the longer the game goes on, the more likely the tower will fall.  And if you’re pulling more pieces than your neighbors, over time it’s more likely that you’re going to have to hand over your title belt at some point.


Where You Do Business

business liability insurance cost

You have a little bit to say in where you setup shop.  However, your choices are often limited based on where you’re from originally, where your family lives, the area where your product or service is in the highest demand, etc.  And believe it or not, that location determines how expensive your insurance is.  Every country, state, county, and even municipality have their own unique characteristics that might make them more or less expensive in the eyes of an insurer.  This might be due to higher crime rates, exposure to catastrophic storms, more liberal/conservative courts, labor and materials costs, etc.  If it makes you feel any better, everyone around you has to deal with the same factors when it comes to the cost of their business insurance solutions


Insurance Market & Economic Factors

business liability insurance cost

Bull markets, beat markets, inflation, interest rates, natural disasters, tax law, and a host of other financial factors can dramatically change how much your insurance costs.  In fact, the insurance market more closely resembles how the market for perishable commodities acts than other traditional financial markets.  The insurance market goes through periods where prices and availability are scarce, plentiful, stable, chaotic, and everything in between.  For example, property insurance for just about everyone increased by 10-20% after Hurricane Katrina and then again following Hurricane Irene and Superstorm Sandy.  Catastrophic weather can dramatically change the price and availability of insurance just like a recession, war, or any other major events.  Evolving regulations and new laws can also have similar effects, both positive and negative!


The Types of Insurance You Purchase

business liability insurance cost

Most organizations need multiple types of insurance solutions.  And the price for those insurance solutions can vary dramatically.  For example, commercial real estate companies pay a pretty hefty price for their property insurance.  However, their worker’s compensation insurance is typically very cheap.  Why?  Well the majority of their workers are office employees while the main assets of their organization are highly valued buildings that could cost a ton of money to fix following a catastrophic fire or flood. 

It depends a lot on the combination of what risks your organization faces most often and what the worst case scenario looks like if you were to suffer a very bad loss.  The more likely the claim and the higher the potential damage of that claim, the higher the business liability insurance cost.


 How Much Insurance You Purchase

business liability insurance cost

There’s good news and bad news when it comes to purchasing different amounts of insurance.  The bad news is, the more you buy, the more expensive it is.  Sorry, no BOGO in the insurance industry.  However, the silver lining is that the unit cost (or rate) you pay for insurance decreases the more you buy.  This means the first $1 million of business liability insurance you buy might cost you $1 per $1,000 and the second $1 million of business liability insurance you buy might only cost you $0.50 per $1,000.  The difference isn’t always this cut and dry but you get the point.  This is helpful if your organization needs higher limits of insurance due to contractual requirements or because you operate in a higher risk industry.  It also means that saving on costs by reducing the amount of insurance you purchase is actually inefficient.  You’re better off looking at other ways to save on your premium…like taking a higher deductible

Find out more about premium savings at the end of this post.

 Your Claims History

business liability insurance cost

Insurance companies are big believers in the saying, “Where there’s smoke, there’s usually fire.”  This specifically applies to insurance claims.  If your organization has a track record for having more claims or worse claims than the average organization like yours, you’re going to get a penalty of sorts added to your insurance premiums.  Unfortunately, there are only 2 solutions to combatting this.  The first is to increase the size of your deductible so you have more ‘skin in the game.’  This means each claim will hurt you more than if your deductible were lower.  It also means the insurance company reduces the total they might have to pay by how much your deductible increases.  And second, you need to work to put the processes and procedures in place to reduce your claims…and then you have to wait a couple years. 

Claims issues are like an avalanche; once they get moving in the wrong direction, it becomes very difficult to reverse the trend. 



 Insurance Company’s Desire to Insure You

business liability insurance cost

You may ask, “Why isn’t this higher on the list?  I can’t control a large company’s willingness to insure my organization.”  Well that’s partly true.  Each insurer has “target” types of business that they want to insure.  All the rest they will either price themselves out of being competitive or flat refuse to quote the insurance.  It’s this first one you have some control over.  Each year, marketing your insurance to the companies that are most willing to write your coverage will result in the most cost-effective program with the lowest business liability insurance cost.  Because of this, you need to make certain you are working with insurance professionals that competitively market your insurance coverage every year so you don’t get stuck paying way more than you should because your current insurer doesn’t even really like insuring the type of organization you’re running.  Again, nothing personal!


Should Cost be the Only Factor in Purchasing Insurance?

business liability insurance cost

In short?  No.  Improper insurance can be cheap and fool you into thinking you’re getting a great deal.  Always focus on the appropriateness of your insurance program along with the value it includes, not just the price.  Higher prices can result from buying higher limits, lower deductibles, adding more types of insurance, or even placing your insurance with a more financially stable insurance company.  It can be tempting to forego that excess liability policy or higher flood insurance limits but the couple thousand bucks you might save in the present could result in hundreds of thousands of dollars in uncovered claims or even the failure of your business or organization. 


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