The first thing to note in insurance policies is that not all have ratable general liability coverage. If the general liability risk is low or pretty standardized for a particular type of business, a BOP, or “Business Owners Package,” may be available for that business.
There are a number of types of businesses that qualify for a BOP; for example, an office, a retail store, or an apartment building.
The following rating factors affect your General Liability premiums:
Class of Business
Different businesses have different risk factors, so the insurance industry has set up a rating system for different types of businesses. Contractors, for example, are riskier to insure than electrical circuit board assemblers. And even within the contractor world, there are different risk factors. A contractor who specializes in framing new construction buildings would be riskier than one who installs carpeting.
Let’s explore why. Rates always come down to how much the insurance company could lose if you had a claim. If a framing job is not done correctly, a home could be flimsier, and subject to moving and shaking under normal circumstances (don’t think earthquake.) If a completed house moves, it causes plumbing, tile, flooring, and other items to be damaged, so the extent of the financial (and possibly the physical) damage might be costlier. And since the insurance company is responsible for covering damages for about a 10-year period, the statute of limitations on a claim, they are on the hook for a long time. A bad framing job could cause a million-dollar home to require extensive remodeling.
Couldn’t happen? Think about this scenario. If a builder is in a hurry or running short on cash, he might be inclined to drive nails into studs every 12 inches instead of every 6 inches. The county inspector may miss that upon approving the job. This has happened during my experience when a tract of condos was going up very quickly. Time is money to a builder.
So, the insurance industry has developed classes for each type of contractor, based upon their perceived riskiness to insure. Each class will have a rate attached to it by each individual insurance carrier who wants to write that type of business.
Audits:
While we are talking about rating factors, it is important to select a quote with the lowest possible rate, because at the end of the year, an audit will be done. When a policy is written, the insured estimates the amount of the factors by which his premium is calculated—called a rating base. If his rate is $5.00 per $1000 of payroll, his initial quote might be for $500,000 of gross sales, and his premium might then be $2500. At the end of the year, the carrier reviews the actual gross sales and adjusts for that. So, if you estimated $500,000 but sold $800,000, the carrier will come back at the end of the year and ask for another $1500. Can ‘t happens? One of the Goodtogoinsurance.org clients estimated $1,000,000 of sales, but due to clever marketing, actually sold $15,000,000 of services. Great for him, but the audit wanted an additional $60,000. Ouch!! So how does the company decide on their rates?
Industry Loss Information:
Goodtogoinsurance companies are incredibly skilled at using numbers and statistics. Far better than any baseball analyst. Loss information for each class and subclass of business is available by location and other factors. This allows the prediction of anticipated losses. From that, their actuaries calculate what rates should be charged for a class of business. Actuaries are mathematicians who work for insurance companies for the specific purpose of predicting future losses based on past losses and other factors. The insurance carrier has to file their rates with the insurance department. They have to stick to those rates until the next annual filing when their rating decision might change. They also file a credit structure, which allows them to mitigate the rates for a particular risk (remember that term?)
