If you operate a business or own a property, you likely carry general liability insurance. The premium is based on a system of varying classifications (similar in this respect to workers comp).
General liability premium rating, how it works
Unlike workers comp – where the rate is applied specifically to payroll, general liability rates are applied to one or more of several factors (known as the exposure base) typically used by insurers. It varies depending on the nature of the business.
Also, the general liability classification system is entirely different from the workers comp classifications. The specific general liability classification system used and their corresponding rates vary by insurer.
The first step is to apply an appropriate classification to the entity being insured. The rate of that classification is then applied to the exposure base in order to determine the premium.
There are other contributing factors that will come into play as well that will affect the rate. Unique characteristics and claims history of an individual business will be considered, resulting in either an increase (debits) or a decrease (credits) in premium.
Specific industries and their common corresponding rating basis
The following is a general guide of various industries and some of the factors insurance companies commonly use in determining premiums. There are exceptions and the precise method may vary by insurer – the following is only a general outline.
| Industry | Rating basis |
|---|---|
| Businesses engaged in the sale of tangible products. (ex: Supermarkets, restaurants, retail, or wholesale operations) | Gross sales/revenue |
| Businesses engaged in providing services. (ex: Tradesmen, Contractors) | Payroll and/or subcontracted costs |
| Schools and social service organizations | Unit count – number of students/clientele |
| Office leasing space | Sq. ft. |
| Real estate – Commercial space, vacant buildings, vacant land | Sq. ft. |
| Real estate – Apartment buildings | Unit count – apartments |
| Real estate – Construction/renovation projects (owner) | Total cost |
Other considerations
For example, a real estate owner of an occupied mixed-use building containing both commercial space and apartments will have the sq ft rating basis applied to the commercial space while the apartments will carry a per-unit rate. Also, note that vacant land that is part of a property containing a building is generally not rated separately.
The importance of correct classifications
It is important to make sure your broker understands the full nature and all aspects of your operations and to check that your policy classifications are accurate as mistakes can frequently occur.
We’ve seen businesses that were misclassified for years, resulting in a much higher premium than necessary. Recently, an insured came to us from a competitor regarding his business which consisted of both wholesale and retail sales. On his existing policy, business sales were classified solely as retail, which carries a much higher rate than wholesale. By separating retail and wholesale revenue, he was able to save himself a lot of money – money that should never have been spent in the first place.
Get proper guidance
As with all insurance-related matters, it’s always important to discuss the exact nature of your business with your insurance broker so he/she fully understands your needs and can obtain the best and most cost-effective policy for your business.
If you have any questions regarding any of the above and how it may pertain to your business or property, please share them in the comments below or contact me directly.
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