General Liability Insurance: The 6 Key Factors That Determine Your Premium

General liability insurance is one of the most fundamental policies for any business. It protects against third-party bodily injury and property damage claims—the risks that come from operating a business in the real world.

But how much you pay for this essential coverage varies dramatically from business to business. While two contractors in the same city might appear similar on the surface, one could pay 30% more or 30% less than the other. The difference comes down to how insurers rate your specific risk profile.

Understanding the six key rating factors for general liability insurance will help you grasp how your premium is calculated and identify opportunities to optimize your costs.

Rating Factor #1: Industry Classification (ISO Class Code)

Your industry classification is the foundation of your general liability premium. Insurers assign every business to a specific class code based on the type of work performed and inherent industry risks.

How It Works

The Insurance Services Office (ISO) maintains a classification system with hundreds of distinct class codes, each identified by a five-digit number. For example:

• Class 6721: General office or administrative operation
• Class 5474: Electrical contractors
• Class 5002: Painting contractors
• Class 6031: Grocery store or supermarket operation

Each class code has a manual rate—the baseline premium per exposure unit (usually per $100 of revenue).

What This Means for You

Your class code assignment is crucial because it establishes the foundation rate for your general liability premium. A professional services firm and a construction company serving the same geographic area will have dramatically different base rates because their inherent risks differ.

What You Can Control: While you can't change your industry, accurate classification matters. Review your policy to ensure your class code truly reflects your primary business operations. Misclassification—either overstating or understating your risk—can lead to premium errors.

Rating Factor #2: Exposure Base (Annual Revenue or Sales)

Once your classification is assigned, insurers apply an exposure base to determine your actual premium. For most businesses, this is your annual gross revenue or sales.

How Exposure Base Works

The exposure base converts the per-$100 rate into your actual premium:

Premium = (Class Code Rate ÷ 100) × Annual Revenue

Example: If your class code rate is $4.50 per $100 and your annual revenue is $500,000:

• Premium = ($4.50 ÷ 100) × $500,000 = $22,500

A business with $1 million in revenue would pay approximately $45,000—double the premium of the $500,000 revenue business, all else being equal.

Why Revenue Matters

Higher revenue typically indicates more operations, more customer interactions, and greater exposure to liability claims. A larger business generates more transactions, services, and customer touch points—all of which increase the probability of a claim.

What You Can Control: This is tricky. You can't simply under-report revenue to lower your premium—that's insurance fraud. However, ensuring accurate revenue reporting is essential. Some businesses with multiple divisions may legitimately be able to separate revenue by class code if different operational divisions warrant different rates.

Rating Factor #3: Business Size and Payroll (Employees)

While annual revenue is the primary exposure measure, the number of employees often influences rating decisions, particularly for businesses where employee actions create liability exposure.

Impact on Premium

Businesses with more employees typically pay more for general liability because:

• More employees mean more customer and public interactions
• More employees mean more opportunity for mistakes or accidents
• More employees often correlate with more complex operations
• Larger operations typically serve more clients, creating additional exposure

Different Measure by Industry

Some industries use payroll as the exposure base instead of revenue. Service businesses, particularly those with many field employees, often use payroll for general liability rating.

What You Can Control: Implement strong employee training programs and safety protocols. While you can't hide your employee count, demonstrating that your larger workforce is well-trained and focused on safety can support favorable rating modifications.

Rating Factor #4: Premises and Operations Characteristics

The physical location where your business operates—and how you operate there—significantly influences your general liability premium.

Specific Considerations

Location Risk Factors:

• Urban vs. rural locations (higher-traffic areas may face different risk profiles)
• Visibility and foot traffic (more foot traffic = more customer interactions)
• Neighborhood crime rates and loss experience
• Proximity to hazardous conditions

Operational Risk Factors:

• Type of customer or public interaction
• Hours of operation (24-hour operations carry different risk than 9-5 businesses)
• Number of customers served daily or annually
• Type of products or services provided
• Use of hazardous materials or equipment

Building Characteristics:

• Building age and maintenance condition
• Type of construction
• Safety features and security systems
• Cleanliness and housekeeping standards
• Lighting and visibility

Example: A retail shop in a busy downtown area with high foot traffic and evening hours will face a different premium than an identical business in a quiet suburban area with daytime-only hours.

What You Can Control: This is one of the most controllable factors:

• Maintain premises in good condition
• Implement strong housekeeping and maintenance programs
• Improve lighting and visibility
• Install security systems
• Document all safety measures and risk controls
• Reduce hours of operation if feasible
• Implement customer management procedures to reduce interactions

Rating Factor #5: Geographic Location and Claims History

Your business location and local loss history significantly impact your premium.

Geographic Factors

Different states, regions, and even neighborhoods have different loss histories. Insurers track claims frequency and severity by geography to adjust their pricing accordingly.

Factors by Location:

• State-specific legal environment (some states are more litigation-prone)
• Local court system tendencies (damage awards vary significantly by jurisdiction)
• Regional economic conditions
• Local competitor loss experience for your industry class

Your Claims History

Your specific business's past claims experience is one of the most important rating factors:

• Number of previous claims (frequency matters more than individual severity)
• Severity of claims paid
• Time since last claim (recent claims weigh more heavily)
• Pattern of claims (repeated similar claims suggest a systemic issue)

Claims that are 3-5 years old gradually become less influential in your rating. Claims from 7+ years ago typically fall off your rating record.

Example: A contractor who has had three small property damage liability claims in the past three years will face a significantly higher premium than an identical contractor with no claims.

What You Can Control: This is partially controllable:

• Implement rigorous risk management programs to prevent future claims
• Document all safety procedures and training
• Report claims promptly (and only when necessary)
• Address root causes of claims to prevent patterns
• Wait time helps—each year without claims improves your rating

Rating Factor #6: Coverage Limits and Deductibles

The coverage limits and deductible you select directly impact your premium. This is one of the few rating factors entirely within your control.

How Coverage Limits Work

General liability coverage comes with per-occurrence limits and aggregate limits:

• Per-occurrence limit: Maximum paid for any single claim (typically $1M, $2M, $5M)
• Aggregate limit: Maximum paid across all claims in the policy period (typically $2M, $2M aggregate, etc.)

A policy with $2 million per-occurrence limits will cost more than one with $1 million limits, typically 10-20% more depending on the additional amount.

Deductible Impact

Your deductible directly affects the premium. Increasing your deductible from $500 to $5,000 could reduce your premium by 15-25%:

Deductible Options:

• $500 - Higher premium, minimal out-of-pocket risk per claim
• $1,000 - Balanced option (most common)
• $2,500 - Moderate premium reduction
• $5,000+ - Significant premium reduction

Example: For a $100,000 annual premium:

• $500 deductible: $100,000
• $1,000 deductible: $97,000
• $5,000 deductible: $82,000

What You Can Control: Completely controllable:

• Choose a deductible that aligns with your risk tolerance and financial capacity
• Higher deductibles = lower premiums (but higher out-of-pocket costs if a claim occurs)
• Consider your cash flow and emergency reserves when selecting deductibles
• Evaluate your risk profile—lower-risk businesses can often justify higher deductibles

Putting It All Together: Your Premium Calculation

Your general liability premium is calculated using this formula:

Premium = Manual Rate × Revenue/Exposure ÷ 100 × Rating Factors (Loss History, Experience, Limits, Deductibles)

Simplified Example:

• Class Code: 6721 (General office operation)
• Manual Rate: $2.50 per $100 revenue
• Annual Revenue: $750,000
• Base Premium: ($2.50 ÷ 100) × $750,000 = $18,750
• Loss History Modifier: 0.90 (10% discount for no claims)
• Final Premium: $18,750 × 0.90 = $16,875

Actionable Strategies to Optimize Your Premium

Immediate Actions (0-3 months)

1. Verify your class code - Contact your broker and confirm your industry classification is accurate
2. Review your revenue reporting - Ensure you're reporting accurate annual revenue (neither over nor under-reporting)
3. Evaluate your deductible - Consider if a higher deductible aligns with your financial position
4. Document current safety measures - List all existing risk controls, training programs, and safety procedures

Medium-Term Actions (3-12 months)

1. Implement/strengthen safety program - Develop written procedures for common risks in your operation
2. Employee training documentation - Maintain records of safety training provided to all staff
3. Reduce claims frequency - Focus on the most frequent claim types in your industry
4. Clean claims history - The best way to lower your premium is to avoid claims

Long-Term Strategic Actions (12+ months)

1. Monitor claims trend - Track the aging of past claims toward the 5-7 year mark when they fall off rating
2. Cultivate positive loss history - Establish a 3-year track record of no claims
3. Professional liability management - Work with safety consultants or risk managers on prevention
4. Relationship building with broker - A broker who understands your business can advocate for better rates as your risk profile improves

Key Takeaway

General liability premiums aren't arbitrary—they're based on systematic assessment of six key rating factors: classification, revenue, employees, premises/operations, location/claims history, and coverage limits/deductibles.

While some factors (classification, location) are largely fixed, others (claims history, safety procedures, deductibles) are significantly within your control. By focusing on controllable factors, you can influence your premium and protect your business simultaneously.

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Next in the Series: Commercial Property Insurance: Understanding the COPE Framework

Have questions about how these factors apply to your specific business? The Volare Risk Management team can provide a detailed analysis of your rating factors and recommend optimization strategies.