What Is Commercial Insurance? An Introduction
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.
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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.
Many first-time buyers of commercial insurance purchase policies because their businesses are reaching a point where they are now exposed to risk. They might own significant assets that need protection, or they may have insurance requirements from the government, their customers, the bank, or their landlords in order to conduct business.
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 four 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 frivolous lawsuits that you might face if the accusation falls under a covered claim.
Commercial general liability can cover a variety of claims, but there are three core coverages to know about:
- Coverage A provides protection from claims that relate to when your business’s operations, products, or completed work cause bodily injury or property damage. Bodily injury includes a person’s physical injury, sickness, or disease, while property damage includes physical harm to a property, as well as the loss of use of that property.
Coverage A also includes a "products-completed operations hazard" provision. This ensures you’re covered if a bodily injury and property damage claim arises after the work has been completed or product has been sold. - Coverage B protects you against claims that relate to personal and advertising injury. For example, these claims are often centered on libel, slander, invasion of privacy, copyright infringement, and the like.
- Coverage C provides a no-fault coverage for the medical expenses of people who sustain bodily injuries on your premises or due to your operations. Coverage C typically has a lower limit than Coverage A and does not require you to be found legally liable for the injury, which is why it is often called “goodwill coverage.” Coverage C is designed to help businesses avoid expensive litigation.
Every business is different, which is why we always advise that you talk to an insurance expert to determine the coverages you need and those you don’t. But 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
Commercial property insurance covers assets that you own from direct damage. This includes the building, the contents inside and around the building and even your property while off-premises or in transit. More specifically, this policy will cover:
- Your Building: This can be a structure you own or do not own but are responsible for insuring (referred to as a triple net lease). In addition to the actual structure, building coverage insures completed additions, indoor and outdoor fixtures, and permanently installed machinery and equipment.
- Your Business Personal Property: This element of the policy covers the building’s contents, such as furniture, fixtures, machinery and equipment, stock, tenant upgrades made to a rented space, leased personal property for which you have a contractual responsibility to insure, and all other personal property you own and use in your business.
- Personal Property of Others: This is coverage for the property of others in your care, custody, and control. This could mean property that you are borrowing or even customer’s property.
Commercial property insurance is often required if a bank financed the property, but most business owners voluntarily 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. Workers compensation insurance 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. Also 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.
Keep in mind that you may have to purchase workers comp insurance even if you consider all your employees to be independent contractors. The short story is that regardless of what you call the person working for you, your state has laws in place to determine how to classify employees and whether the organization paying the bills is required to cover them with workers comp insurance. For example, if you dictate when a person starts and ends work, tell them what tools they must use, or specify how they must perform their work, this typically would classify them as an employee, not an independent contractor.
This is a very complicated topic that business owners often find confusing, so it’s important to speak with an insurance expert about your specific situation to determine if you need this coverage.
How Commercial Insurance Pricing Works
Commercial insurance companies need a simple way to understand different business risks and the scale of an insured'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 other’s 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 importantrating 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
What to expect when working with us
Each insurance broker has different values and processes. At LandesBlosch, we know you are busy. That’s why we try to learn about your business and offer a competitive quote as quickly as possible. If your business is incredibly unique, large, or complex, this process might look a little different. But for most businesses, we can turn around quotes instantly or within 2 business hours.
Here is our process for getting an insurance quote:
1. You fill out our online quote application.
Get started by telling us a little bit about your business in our online quote form here. These basic questions help us understand your business, unique operations, size, and risk.
2. We follow up with any additional questions.
We will follow up, usually within the same business day, to get any additional information needed to complete your quote.
3. We quote 5-10 insurance companies on your behalf.
Once we have all the information we need to begin, we seek quotes from 5-10 insurance companies on your behalf.
4. We present you with the quotes and answer any questions you have.
Once we’ve gathered all the quotes, we show you your options and help you choose the best policy for your business. This includes reviewing deductibles, coinsurance options, exclusions, and costs.
To help you choose which insurance policy to purchase for your business, we recommend reading our article, “How Do You Compare Different Business Insurance Quotes?”
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.