When it comes to running a business, protecting it from potential risks and liabilities is crucial. One of the most common forms of insurance that business owners invest in is general liability insurance. This type of insurance provides coverage for property damage, bodily injury, and other liabilities. However, many business owners are often confused about the basis of general liability insurance. Is it based on payroll or sales? Let’s delve into this topic further.
Before we dive into the details, let’s define what general liability insurance is. In simple terms, it’s a type of insurance that covers a business from potential lawsuits and claims that arise from bodily injury, property damage, and advertising injury. The policy typically covers the legal fees, settlements, and judgments that may arise from such claims. Now, let’s discuss the two main bases of general liability insurance: payroll and sales.
Payroll-Based General Liability Insurance
Payroll-based general liability insurance is calculated based on the total amount of payroll that a business has. This means that the premium for the insurance policy is based on the total amount of wages or salaries that the business pays out. This is because the more employees a business has, the higher the risk of potential liability claims arising from workplace-related accidents or injuries. Here are some points to consider:
- The amount of payroll is usually calculated based on a specific period, such as a month or a year.
- The premium rates for payroll-based general liability insurance vary depending on the industry, the number of employees, and the type of work that the business does.
- Businesses that have a high risk of workplace accidents, such as construction companies, often have higher premiums than businesses that have a lower risk.
Sales-Based General Liability Insurance
On the other hand, sales-based general liability insurance is calculated based on the total amount of sales that a business generates. This means that the premium for the insurance policy is based on the total revenue that the business earns. This is because the more sales a business has, the higher the risk of potential liability claims arising from product-related accidents or injuries. Here are some points to consider:
- The amount of sales is usually calculated based on a specific period, such as a month or a year.
- The premium rates for sales-based general liability insurance vary depending on the industry, the type of products sold, and the sales volume.
- Businesses that sell products that have a higher risk of accidents, such as toys or electronics, often have higher premiums than businesses that sell products that have a lower risk.
Which Option is Better?
When it comes to choosing between payroll-based and sales-based general liability insurance, there is no one-size-fits-all answer. The choice depends on the nature of the business, the industry, and the risks involved. Here are some points to consider:
- Businesses that have a high number of employees and a low sales volume may benefit from payroll-based general liability insurance.
- Businesses that have a high sales volume and a low number of employees may benefit from sales-based general liability insurance.
- Businesses that have a high risk of both workplace accidents and product-related accidents may benefit from a combination of both options.
Final Thoughts
Choosing the right basis for general liability insurance is crucial for protecting your business from potential risks and liabilities. Whether you opt for payroll-based or sales-based general liability insurance, make sure to consider the nature of your business, the industry, and the risks involved. It’s always better to be safe than sorry.