There are several factors that go into determining commercial insurance premiums for businesses to protect against lawsuits, property damage, accidents, and other events and hazards that may arise. The following are four factors used to calculate how much business insurance will cost.
1. Business Operation
A business’s operation plays a significant factor in the rates being charged to protect against liability risks. A higher-hazard business, like a construction firm or manufacturing plant where there are greater liability risks as a result of being responsible for other people’s property, will pay more for general liability coverage than, let’s say, an accounting firm. It’s important to note that, by digging deeper into your business operation, you will discover other liability coverages that are needed, depending on the industry and type of work performed. This would more than likely add to the cost of insurance. For example, an accounting firm should also have professional liability coverage as part of its insurance program to protect against costs associated with allegations of financial damage resulting from negligence or errors and omissions in the services it performs.
2. Business Location
The location of the business plays a critical role in the rates charged for commercial property insurance. Businesses in zones considered hazardous, such as a tier-one flood or wildfire area, will pay more for insurance due to the higher level of risk for property damage. A flood policy must be purchased for protection, and those in wildfire-prone areas may be required to self-insure up to a certain amount. Hail and wind are also hazards that often require sub-limits or deductibles for those businesses located in high-hazard areas.
3. Own or Rent?
If the business owns the space in which it operates, a commercial property policy must include coverage both for the building itself and for its building's personal contents. Obviously, insuring the building itself will cost more. If the business rents the space, the type of operation again will come into play. A restaurant will likely pay more for property insurance for its contents than a real estate operation, due to the greater exposure in running a restaurant. The extent and value of business equipment also contribute to the cost of insurance, including the need to purchase equipment breakdown coverage.
4. Loss History
If a business has had prior claims, particularly for the same type of incident, the applicable insurance policy will run more. There is a perceived higher risk that another similar claim will occur, and the premium will reflect this. For example, if a restaurant provides food delivery service as part of its operation and there have been a number of automobile accidents, the commercial auto policy will cost more than for an establishment with no vehicular accidents. In order to pay less for coverage, it’s important for a business owner with a claim's history to get to the root cause of the accidents and take measures to prevent them from occurring, such as employing consistent practices when it comes to driver motor vehicle checks, driver safety training, fleet safety, etc.
There are many risk-management strategies available to help keep insurance costs in line. A business with a good risk profile will fare more favorably than one with losses or in a high-hazard industry when it comes to commercial insurance premiums.