Commercial Insurance 101: An Introduction

November 17, 2019

You have worked hard to build your business. Whether it be the significant cash investment required to open your doors or the hours spent building a profitable business, you now need to protect that investment.

Commercial insurance can seem complicated. There are virtually unlimited options for you to purchase or not purchase. Knowing the basics with some commercial insurance 101 knowledge can help you manage your business risk, while helping you save money on coverage that you may not really need.

An Introduction To Commercial Insurance

Before jumping into commercial insurance 101, let's first understand the reasons why both large and small companies buy insurance.

Commercial insurance protects your business and investments from events that could devastate your assets. It provides critical protection to both the property you own and liability arising from the damages you cause others.

How Commercial Insurance Works

Commercial insurance is typically a one-year contract that agrees to assume your business liabilities for a negotiated amount of money at the beginning of a policy term.

This amount is generally determined by the amount of property you own or the liabilities you are exposed to. Oftentimes, the limits can be decided based on requirements that your landlord, vendors, or project partners need you to comply with.

4 Basic Commercial Insurance Coverages You Need

Every business is unique and requires different insurance coverage. Of these commercial insurance facts, there are 4 policies you should purchase or will most likely need to purchase at some point.

General Liability Insurance

General liability insurance covers bodily injury or property damage you cause others arising out of your business operations. This gives you protection from slips and falls, product liability, and various other costs.

This insurance policy covers not only the damages you cause, but it will also pay defense costs associated with settling lawsuits. Additionally, this policy will cover and pay for the defense costs of frivilous lawsuits that you might face if the accusation falls under a covered claim.

One of the most important rules to remember in this introduction to commercial insurance is that every business and nonprofit operation should have a general liability policy at a minimum.

Buildings/Contents Insurance

Property insurance covers property that you own from direct damage. This coverage can protect buildings and the contents inside and around the building. You can also get coverage that insures your property while off-premises or in transit.

This coverage is often required if a bank financed the property, but most business owners choose to purchase coverage to protect their investment. If not required by a bank, a business owner has to decide how critical the property is to their business and how easily they could replace it in the event of a disaster.

Commercial Auto Insurance

If you have vehicles you use for your business operation or are owned by the business, you will need a commercial auto insurance policy. This policy covers your liability associated with the operation of the vehicle and any damage caused to the vehicle.

If your business owns vehicles, this commercial auto liability is required by state law. At LandesBlosch, we suggest auto liability limits of at least $1,000,000 to protect the business. If your automobiles are larger than pickup trucks, we often recommend an excess policy to increase the auto limits.

Workers' Compensation Insurance

If you own a business, you have or might have employees whom you are responsible for. If these employees are injured doing a job you instructed them to do, you are liable for their medical bills and paid time off work. These medical bills can get very expensive, depending on the severity of the accident. This coverage takes care of both the medical expenses and payments to the employee for the time they are unable to work.

In most states, this coverage is required if you have employees who aren't family members or owners in the company. In most states, you purchase this policy through private insurance carriers. Although, in North Dakota, Ohio, Washington, Wyoming, Puerto Rico, and the U.S. Virgin Islands, you purchase workers' compensation through the state fund.

How Commercial Insurance Pricing Works

Commercial insurance companies need a simple way to understand different business risks and the scale of an insuree's operations. Insurance companies must also have the ability to quantify and adjust their rates in a way that allows them to accurately determine risk.

As always in the insurance industry, there are many different methods and circumstances to achieve the same thing, but here are two primary ways commercial insurance ratings work.

Rating For Liability Coverage

Insurance companies need to understand the liability risk of a company since they will be paying for the associated liability judgments.

Generally, insurance companies will take the loss data from thousands of companies similar to yours and develop a rate that will allow a pool of customers with similar operations to pay for each others' losses.

Most of the time, this rating figure is based on the revenue of your company multiplied by the loss rate of the risk pool

Revenue x Loss Rate = Liability Premium

Although revenue is a good way to determine the size and risk of most companies, such as manufacturing and retail, it is a poor way to determine risk for other businesses.

For companies such as construction, the rate will be based on payroll instead of revenue. Regardless of your business type, find out what your liability premium is based on and make sure to keep that figure updated throughout the year to avoid an audit.

Rating For Property Coverage

Although similar to liability coverage, property coverage can be a little more complex to price. There are many different types of property and ways to price them. Most commonly, the figures are rated on the industry type that occupies the building or owns the contents, since that is how the property will be utilized.

The second rating factor is based on the construction of the building. This will determine the risk of damage for common threats, such as fire or wind. For example, a wooden-frame building will have a higher risk for fire than a metal building (especially if the wooden-frame building does not have a sprinkler system).

Finally, one of the most important, if not the most important rating factor, is the location of your property. This will determine your exposure to catastrophic loss such as hurricanes, wildfires, tornadoes, earthquakes, and floods.

Insurance underwriters will condense all these variables into a local property rate that is the total insured value multiplied by the property exposure rate.

Total Insured Value x Property Rate = Property Premium

Summary

Protecting your investment in your company is an important part of creating an organization that lasts. Take the time to learn how commercial insurance works, know your exposures, and talk to an insurance professional about common claims in your industry. You can get protection from vulnerabilities with a tailor-made insurance policy designed specifically for you.

About The Author: Austin Landes, CIC

Austin is an experienced Commercial Risk Advisor specializing in property & casualty risk management for religious institutions, real estate, construction, and manufacturing. He has his Certified Insurance Counselor designation and has been featured in multiple national publications for his expertise in commercial insurance.

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