Liability insurance question

[Fireball]

Okay, so today I go to my State Farm agent who insures all our cars, home and my husband's business. I tell her I want liability insurance for my business and equipment indemnity if my homeowner's insurance won't cover it. She says she will have to get a quote and call me back.

When she calls back she wants to know what my projected gross receipts will be which will determine their quote. I gave her a guesstimate, and she says I will be audited at the end of every year based on my gross receipts to determine if I've paid enough. If I haven't they'll bill me for the difference.

I'm totally confused over this. I thought only the IRS could audit you, not the insurance company. And why would they need to see my gross receipts for liability insurance? Could someone please explain all this in "laywoman's" language?

[CaptainTom]

I am certainly not qualified to discuss anything in "laywomans" language, but I've never heard of such crap.

Join PPA and take advantage of their liability and equipment coverages....

Benefit Details | Professional Photographers of America scroll down a bit to insurance.

[Roadrnr]

It's pretty common for an insurance company to do this. With commercial insurance policies the premium is based mostly on what your annual receipts total. It's always tough with a new startup business to calculate what the gross receipts will be for the coming year, but the following years it will become easier to calculate what you take in for the next year.

The insurance will audit to make sure that it charged you the correct rate based on how much your receipts total out to be. Obviously, if you over estimated, you would get a refund in premium too because they charged too much.

The gross receipts is a reflection on how much business you do. The higher the gross receipts, the more clients you probably had, therefore more risk of a liability claim. Let's say you estimated $150k for the year, which equated to maybe 15 customers, but you really did $250k and had about 25 customers. That means you had more customers where there could have been a claim (or could still be in the future)

Insurance is a risk based business...the more risk, the higher the cost.

Granted you could have had the same number of customers at a higher gross receipts, but your risk was still greater too.

Tom: I haven't used PPA for their liability insurance, but I would imagine they would need to need the same things for determining rate on a liability policy.

Charrie, make sure that the policy with SF includes products and completed liability as well as event liability. The event liability is not always covered in a general commercial liability policy and that would cover you during a shoot (wedding or portrait)

[CaptainTom]

I guess I'm just an idiot about insurance so take this with that in mind.

If I see 300 clients and average $100/sale, why is my cost less than someone who sees 100 clients and averages $500/sale ?

It would seem that the 100 clients would represent less exposure, yet since the gross is more, they pay more ?

[Howard Barlow]

Same way workers comp is figured.

[CaptainTom]

Originally Posted by Howard Barlow

Same way workers comp is figured.

really? how is workers comp figured ?? remember, I'm an idiot about insurance.

[Fireball]

Thanks Matt. That makes sense now.

Tom, do you not get audited by your insurance company every year? Is that what everyone goes through?

I just researched online and State Farm has a "Business in the Home Program" which includes "property, liability, loss of income and records. There are many extra options available that let you tailor your policy to fit your own particular business needs."

I'm a location photographer only so I go to where the person is or where they want to meet. I don't have a studio, don't want a studio, at least not at this point in my life. But I do store all my equipment at home so I'm thinking I need "contents insurance" and maybe "general liability insurance" and "Professional liability insurance." But I guess none of those are "event liability". Wow, this sounds expensive!

[trac76002]

PPA does the same thing with Gross Annual Receipts. Not sure how/if they actually audit. Just reading up on it because I am about to apply.

[CaptainTom]

I report to PPA if my gross receipts is substantially different than the previous year but I wouldn't qualify that as an audit. Maybe I'm putting the wrong definition to audit ? I think of it as someone going over my books to verify my income, assets, etc.

I have professional liability insurance and equipment loss insurance.
It may be that State Farm is not understanding your business and is trying to sell you something you don't need. I bet if you sat down with them and talked a bit more they'd come up with something more suitable.

Look over the PPA insurance. It is tailored for exactly what the photographer needs.

[Fireball]

Yeah, but just to be an aspiring member it's $194/year and then when you add insurance on to that and everything else...hmmm...gonna talk in more detail to my agent tomorrow and get some other quotes from other places, too. Thanks for your help!

[Steelsun]

The audits are part of the contract, you agree to them.

That being said, you can find one that does not require them, all based on "ranges" of gross receipts. When I managed a very healthy PI company for years, we never had an audit and regularly had yearly receipts that fluctuated (sometimes 300K, sometimes 500K, once over a mill).

[Howard Barlow]

Originally Posted by CaptainTom

really? how is workers comp figured ?? remember, I'm an idiot about insurance.

As Charrie said. It's been several years since I had any employees (never again), but it was either based on your annual sales, or annual payroll. You guess your first year, then, it is adjusted annually after that. Or, something like that. Hope that clears up all unanswered questions, Tom. If not, I can guess again.

[Roadrnr]

Originally Posted by CaptainTom

I guess I'm just an idiot about insurance so take this with that in mind.

If I see 300 clients and average $100/sale, why is my cost less than someone who sees 100 clients and averages $500/sale ?

It would seem that the 100 clients would represent less exposure, yet since the gross is more, they pay more ?

heh...yeah, I won't say that it makes sense or that I agree with it, just the best way I could think to explain it.

The 100 clients wouldn't really equal to less exposure. I say that because those 100 clients @ $500/sale was a higher risk due to the amount of additional services you provided vs. the 300 clients @ $100/sale. You have more to lose in each of those 100 clients @$500 than you do at the 300 clients.

Originally Posted by Fireball

Thanks Matt. That makes sense now.

Tom, do you not get audited by your insurance company every year? Is that what everyone goes through?

I just researched online and State Farm has a "Business in the Home Program" which includes "property, liability, loss of income and records. There are many extra options available that let you tailor your policy to fit your own particular business needs."

I'm a location photographer only so I go to where the person is or where they want to meet. I don't have a studio, don't want a studio, at least not at this point in my life. But I do store all my equipment at home so I'm thinking I need "contents insurance" and maybe "general liability insurance" and "Professional liability insurance." But I guess none of those are "event liability". Wow, this sounds expensive!

The best thing anyone can do is talk with their insurance agent to make sure that you are getting the coverage that you need specifically.

Obviously being worried about losing or damaging cameras is important, but also if someone trips over a cable at a shoot and hurts themselves, you want to make sure the liability portion of the policy covers that also. The event liability could be the wrong term to use, while a professional liability could be what you need.

Always ask your agent about what is covered under your liability policy.

[STP Images]

There are two reasons they ask for this information. The first has been covered already - they want to know what the risk of insuring you is. More business means more risk. The more income you generate, the more individual circumstances you have for a claim, whether that comes in the form or an accident or a loss.

The second reason they ask for annual earnings is a FULL liability policy includes "business interruption" insurance. This coverage pays you a percentage of what you normally invoice if your business is shut down from a loss. For example, when Hurricane Ike slammed into the coast 18 months ago, photographers with studios that shut down due to the storm were paid through their business interruption coverage. If the insurer doesn't know what you earn, they can't pay the business interruption insurance.

The audit is NOT what you think. I complete an audit every year on my liability policy. They email me a link to a secure website and I enter 6 pieces of data and click "send". That's it.

All insurers are different and all policies cover different potential losses at different rates, so talk to your insurance agent. He/she can clear up any uncertainties as to the reasons for the data request.

[Fireball]

Yep, yep, yep. That's exactly what my insurance agent has quoted me--the full liability policy which includes the business interruption insurance. My biggest concern now is estimating the wrong amount for gross receipts and having a bunch due at the end of the year.

Thanks for all your help.