What to Pay for Liability Insurance

The formula used to determine your quote depends on what type of company you run. It's worth shopping around because prices can vary dramatically
By Karen E. Klein

Our company purchases general liability coverage based upon our monthly sales total. Recently, we noticed that we have been paying the insurance based upon our total monthly sales figure, including sales tax and shipping costs. Should we be deducting the sales tax and shipping costs to get the actual monthly sales figure needed to calculate liability insurance? —M.L., Billerica, Mass.

Sales tax and shipping costs should not be included in the figure you calculate as your monthly sales for purposes of purchasing liability insurance, experts say.

If your coverage is based on your sales figures, that means yours is likely a manufacturing or distribution company. For firms like yours, your sales volume is the most significant factor determining how much coverage you need.

For professional service firms, such as consultants and attorneys, general liability insurance is typically priced based on the square footage of occupancy at the firm, says Richard B. Hagemeier, executive vice-president of Bolton & Co., a Pasadena (Calif.)-based insurance brokerage. That's because their most significant general liability risk is from an accident on the premises. "Although the more significant liability risk [of a service firm] is typically from performing their professional service, those services rarely injure people physically or cause property damage," he says. Professional services themselves are insured under an errors and omissions or professional liability policy.

Contact your insurance broker and explain that you've inadvertently been overpaying, suggests Hana Rubin, a principal at the Maxon Co., based in Irvington, N.Y., which administers medical insurance and pension plans. You may be able to request an audit of your actual sales, during which tax and shipping costs would be excluded.
Wide Range of Quotes

But if your sales are less than a certain threshold—typically $1 million—it may not matter whether you've included tax and shipping, says Edward Minkovski, a broker at ARG Insurance Services in Los Angeles. Some insurers offer a fixed price for coverage based on revenue ranges, so unless your tax and shipping costs put you into the next revenue bracket, excluding them may not make any difference in what you're paying.

Still, it's worth looking into, Minkovski says. And if your policy is expiring, or set to expire soon, make sure to shop around for new coverage. "The market during the last couple of years has been soft and the insurance companies are hungry. You'll be shocked how much the prices vary and how many good deals there are out there," he says. For instance, he says he's seen general liability quotes that vary from $500 annually to $2,100 annually from various insurers for the same exact company and coverage.

Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

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