Insurers calculate general liability insurance premiums using several key factors, including industry codes, gross revenue, claims history, and geographic location. Each factor is important, and even within the same industry, one difference, such as gross sales, can greatly impact the cost. Given, it’s not an unreasonable question why the business next door pays significantly less for general liability than you do.
General liability insurance is a key coverage for small businesses, but it doesn’t have to break your budget. Using a variety of factors in evaluating the companies, including obtaining quotes, we’ve put together a list of the cheapest general liability insurance companies.
General Liability Rating Systems
The first thing to understand about how general liability premium is calculated is that every insurance company rates risk—and most of them do so based on uniform industry classifications. While classifications are not the only part of the premium calculation, they do play an important part.
They can be found in common coding databases like the Commercial Lines Manual produced by the Insurance Service’s Office (ISO). Most insurers start with the ISO rating but may go with one of the other common databases, such as the North American Industry Classification System (NAICS), National Council on Compensation Insurance (NCCI), and Standard Industrial Classifications (SIC).
The purpose of classification is to group similar industries that share common hazards together, allowing the carrier the ability to rate the specific risk of the industry. So, based on what your company does, there will be a standard rate defined as the starting point for insurance carriers to use.
Every insurance provider prefers certain industries over others and will price policies accordingly. An insurer calls this its appetite, meaning it wants to write insurance for a specific industry and will also have other industries that it is not interested in insuring.
Classifications
To find out how your business is classified, check the declaration page (first page) of your insurance policy—the general liability class code for your industry will be listed there. Because the nature of your business can change and the classification influences the premium, it is a good idea to review your business’ assigned classification to ensure you are not overpaying for insurance based on a riskier industry.
Classifications start with the industry and then get more granular with subclassifications for specific types of businesses within the industry. With the ISO, the classification code that defines the industry is a five-digit code.
For example, the following five-digit codes pertain to common industries with the ISO:
- 10000–19999: Mercantile
- 40000–49999: Miscellaneous
- 50000–59999: Manufacturing or processing
- 60000–69999: Building or premises
- 90000–99999: Contracting or servicing
Meanwhile, NAICS codes start with a two-digit code and expand the category up to six digits, depending on how granular you want to get. For example, Construction is code 23, with Residential Building Construction being code 2361 and New Single-Family Housing Construction being code 236115.
Rates & Premium Basis
The rates are defined based on the classification code. These are generalized rates and serve as the starting point based on the risk that the industry has. This is referred to as the “premium basis.”
The premium basis, sometimes called an exposure basis, is based on a value per $1,000 of gross sales, payroll, or other defined metrics. An easy way to understand it is this: the insurer will use either your gross sales or payroll when determining what to charge your business.
Additional Factors in General Liability Rating
Outside of classifications and your business revenue, there are additional factors that will be considered by insurance companies when calculating general liability insurance premiums. Each has its own proprietary rating that it will incorporate when calculating the premium.
Despite the unique approach of each insurer, there are common areas of assessment.
1. Premises and Operations
The premises and operations will play a role in your premium calculation. This includes where the building is, how big it is, the amount of foot traffic to your establishment, and the hours of operation. This is important in determining general liability insurance costs because it speaks to the potential claims that may occur.
For instance, a bigger facility with more foot traffic is at a higher exposure for slip and fall accident claims. Another example of how operations will affect your rate is if you run something like a car wash that might lead to damage of personal property—the more likely you are to have a claim come from damaging someone’s property, the higher your premiums will be.
Even the geographic location will impact the general liability premium. A small gas station in a rural setting has less risk exposure than in the center of a major metropolitan area like New York or Chicago.
2. Business Size
While the physical size of your business is likely covered in the premises portion of the rate calculation, how much business you do and how many customers you serve will affect the rate. This might be defined by business revenue or gross sales. The higher your revenues, the higher your risk classification will be.
The rationale behind this makes sense. A new business without much in revenue isn’t selling a lot of products or services and is, therefore, less likely to have more interactions that can lead to a claim. As revenue grows, so does the exposure.
Additionally, big companies tend to be targets for those wanting to make fraudulent claims or go after larger dollar amounts to settle real claims simply because of the perception that the company can afford it. This is why a sole proprietor handyperson is going to have less risk exposure than a small construction company with 50 employees.
3. Industry Experience
One of the questions that many underwriting applications will ask is how many years has the company been in business and what is the industry experience of management. Younger companies or those with management that are less seasoned suggest a higher risk since the company may not have the resources or understanding to avoid claims.
A startup can have trouble finding insurance and may have to go to a specialty market because insurers prefer data specific to a company when trying to assess the risk. Simply put, the more experience a company has, even by virtue of its management, the less risky it is seen by the insurance company—and premiums reflect that.
4. Claims History
There is no secret that the insurance industry uses claims history to rate insurance policies. Those with no claims often get a claim-free discount. The fewer claims a company has, the more favorable of a rate it will get. Conversely, the more claims a company has, not only is it more expensive, but it may be hard to find an insurance carrier willing to underwrite the risk.
5. Policy Limits
When purchasing insurance, you have some freedom in the limit of coverage. Most insurers will offer a standard general liability limit of $1 million per occurrence and $2 million aggregate. However, rates can be higher, say, $2 million per occurrence and $4 million aggregate, or lower, like $300,000 in total coverage.
Raising or lowering the rate will result in a higher or lower general liability insurance premium. Additionally, general liability often carries a number of insurance endorsem*nts, such as hired and nonowned auto, garage keepers liability, and liquor liability.
All the little inclusions will add to the policy premium. Talk to your insurance representative about whether or not a specific coverage is necessary for your business. If it isn’t, you can eliminate that additional cost.
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 premium, 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. Take our research as an example: 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 of 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)
General liability premium is calculated using a combination of industry classification codes, claims history, payroll, business revenue, and an insurer’s own proprietary methods.
If your business has recently had an at-fault claim, then this will likely impact your premium. The best thing to do is 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 range depending on industry. Swim instructors may pay anywhere from $170 to $400 annually, while an electrician may pay $500 to $1,200 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 the premium. Understanding why something affects costs helps you better manage risk in your business to reduce liabilities and, thus, premium. All premium calculations start with the class code and then factors things like location, revenues, and claims history. Use this information to help you find the cheapest general liability insurer that fits your needs.
