Orlando Harmon
Commercial insurance, also known as business insurance, is designed to protect businesses from unexpected events such as lawsuits, theft, fires, or accidents. It covers property damage, bodily injury, and professional mistakes. The cost of commercial insurance can vary depending on various factors, and premiums are based on gross sales or payroll. Some factors that can influence the cost of commercial insurance include the frequency and severity of claims, inflation, supply chain issues, and vehicle repair expenses. Additionally, commercial auto insurance prices have been on the rise, with an average increase of 8.9% in the fourth quarter of 2024, according to the Council of Insurance Agents & Brokers (CIAB). Understanding the causes of premium increases can help business owners make informed decisions about their coverage choices.
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What You'll Learn
Inflation and supply chain issues
Supply chain issues can also impact the cost of commercial insurance. For example, the increased cost of vehicle repair due to supply chain issues has led to higher commercial auto insurance premiums. Additionally, supply chain issues can delay repairs to commercial properties, resulting in more expensive losses if a business's ability to generate revenue is impacted.
Inflation can also directly affect commercial insurance costs. During inflationary periods, it is crucial to review property valuations annually to ensure that coverage keeps pace with labour and supply costs. Even with normal levels of inflation, proactive risk-management planning can help drive down costs.
The impact of supply chain issues on inflation and commercial insurance costs is complex and multifaceted. While supply chain disruptions can contribute to inflation and increased insurance costs, other factors, such as monetary policy and demand, also play a significant role. As of June 2024, overall inflation had moderated significantly, and supply chain bottlenecks had improved compared to 2021. However, ongoing conflicts and shipping challenges in the Middle East and the Red Sea could potentially fuel future inflation upticks and impact global trade.
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Increased jury awards
Commercial insurance is designed to protect businesses from unexpected events, such as lawsuits, theft, fires, or accidents. It covers property damage, bodily injury, and professional mistakes. Without commercial insurance, businesses would have to pay out of pocket for costly claims.
One of the factors contributing to the increase in commercial insurance costs is the rise in jury awards. Jury awards for both third-party injuries and employees filing discrimination, harassment, or other employment-related lawsuits are on the rise. The increasing cost of claims, coupled with rising inflation, is leading to higher insurance costs.
The size of jury verdict awards has been increasing significantly. From 2010 to 2018, the size of jury verdict awards grew by 33% annually, far outpacing overall inflation and healthcare costs. This trend has continued, with jury awards reaching tens of millions, and even billions, of dollars in personal injury and liability lawsuits. The increasing magnitude of jury awards is contributing to the rise in insurance costs, as insurers need to account for the potential financial exposure associated with these larger awards.
There are several factors contributing to the increasing size of jury awards. One factor is the perception of corporate mistrust and a "lottery mentality." Jurors often view corporations as unethical and driven solely by profit. This perception can influence their decisions and lead to larger awards, especially when a corporation is perceived to be at fault. Younger jurors, in particular, tend to distrust corporations more, and social media and technology have been cited as potential contributors to this sentiment. Additionally, jurors may double the award amount requested by the plaintiff's attorney to ensure that the injured party is adequately compensated.
The impact of increased jury awards on commercial insurance costs is particularly notable in certain sectors, such as commercial transportation, which has been severely affected by more frequent lawsuits and higher jury awards. The rise in jury awards has also been accompanied by an increase in attorney representation in commercial claims, resulting in higher costs and longer resolution times.
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Higher repair costs
Commercial insurance costs have been increasing due to a variety of factors, with one of the main reasons being higher repair costs. This can be attributed to the following causes:
Inflation and Supply Chain Issues
The supply chain issues and inflation that occurred in 2021 and 2022 caused a significant increase in the prices of key building materials such as lumber and steel. This, in turn, led to higher repair and rebuilding costs for businesses, resulting in more expensive insurance claims. While inflationary pressures have eased somewhat, building and property-related costs remain higher than in previous years.
Extreme Weather Events
Severe weather events, including thunderstorms, wildfires, heatwaves, and hurricanes, have resulted in extensive damage and increased the demand for repairs. The costliest event for insurers in 2023 was a heatwave and drought in the South and Midwest, which caused $14.5 billion in damages. Convective storms in the same year resulted in over $50 billion in damages, the highest annual amount ever recorded. These weather events have not only increased the demand for building supplies and labour but have also led to a rise in auto claims, with hail damage claims increasing by 85% in 2023.
Vehicle Repair Costs
The cost of vehicle parts and labour has been steadily increasing, with a 14% and 10% rise, respectively, in the fourth quarter of 2022 compared to the previous year. By 2023, vehicle repair costs had climbed 23% over 2022, far outpacing the average inflation rate. This has been exacerbated by an increase in vehicle accidents as driving levels have returned to pre-2020 levels.
Labour and Supply-Costs
During inflationary periods, it is crucial for businesses to annually review their property valuations to ensure that their coverage keeps pace with rising labour and supply costs. Details about the covered property's construction, including real property (buildings, pavement, land, plumbing, electrical, etc.), business personal property (furniture, machinery, supplies), and other factors can impact the valuation.
Impact on Business Revenue
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Business income limits
Commercial insurance, also known as business insurance, is designed to help protect businesses from unexpected events, such as lawsuits, theft, fires, or accidents. It covers property damage, bodily injury, and professional mistakes. Business income insurance, also called business interruption insurance, is a type of commercial insurance that helps businesses cover lost income and additional expenses when they are unable to operate due to covered property damage. This can include lost profits, payroll costs, utility bills, advertising costs, and rent or mortgage payments.
The business income equation is: Business income = revenue - expenses. Insurance Services Office (ISO) worksheets can help businesses calculate their business income by determining their income over the previous 12-month period and estimating their income for the next 12 months, taking into account any expected changes. Businesses can also include Extended Business Income coverage, which protects against ongoing losses after operations have resumed. This coverage typically has a specified timeframe in the policy.
To avoid underinsurance, businesses should regularly reassess their property valuations, especially during inflationary periods, to ensure that their coverage keeps pace with labour and supply costs. Businesses should also be aware of coinsurance, which is a monetary penalty incurred when a building is not insured to value. Understanding the coinsurance clause in their commercial property policy is crucial to avoiding unexpected costs.
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Vehicle damage
Commercial insurance, also known as business insurance, is designed to protect businesses from unexpected events, such as lawsuits, theft, fires, or accidents. Commercial auto insurance is a type of commercial insurance that covers business-owned vehicles used for work. It helps cover property damage and medical expenses resulting from accidents.
When it comes to vehicle damage, there are a few key considerations. Firstly, most insurance policies will cover vehicle damage up to specified limits, but the coverage details and eligibility depend on various factors. Collision, comprehensive, and uninsured or underinsured motorist property damage coverage options may be available. Understanding these options, as well as the claims process and legal considerations, can help navigate repair costs and handle total loss situations.
Secondly, the cost of vehicle repairs can significantly impact insurance claims. By the fourth quarter of 2022, vehicle parts and labour costs had increased by 14% and 10%, respectively, over the previous year. This has contributed to a notable rise in vehicle repair costs, outpacing the average inflation rate. As a result, there has been an increase in vehicle accidents as driving levels have returned to pre-2020 levels.
Additionally, it is important to understand the concept of diminished value. Even after professional repairs, a vehicle's value may decrease due to its accident history. In many states, drivers can pursue a diminished value claim against the at-fault party's insurance, although this typically involves a formal appraisal. Most states do not allow drivers to claim diminished value under their own collision coverage.
Finally, it is worth noting that insurance companies may write off a vehicle if the cost of repairs exceeds a certain percentage of the vehicle's value. This threshold can vary, and some insurers may write off a car if the repair costs are as low as 60% of the car's value. In some cases, policyholders may negotiate with their insurance company to avoid having their vehicle written off.
In summary, commercial auto insurance can provide valuable protection for businesses operating vehicles. Understanding the coverage options, cost factors, and claim considerations can help businesses effectively manage vehicle damage repairs and related expenses.
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