Blog Authored by: Garry Watts, CPCU
Do you think your organization pays too much for auto insurance? If you are like most business owners, your answer to that question is a resounding "yes!"
There are four variables that affect the premium of a commercial auto policy. By understanding these variables, you should be able to properly classify your vehicles, thereby achieving the lowest possible premium that an insurance company can offer. If your policy contains mistakes in any of these four areas, your pricing will be affected, and your premium could be substantially higher than it should be. If an insurance underwriter has any doubt, they will always use the more expensive classification. This misinformation is not in the best interest of the business owner.
The first variable in determining the premium for a commercial vehicle is to classify its "use" from the following categories:
- Retail Use - most expensive
- Commercial Use - moderately expensive
- Service Use - least expensive
Given the nature of the classification system, it is important that you work with your broker to determine if any of your company's vehicles can be moved to a lower classification. If the insurance company's underwriter is uncertain about a vehicle's use, they will use the old adage "when in doubt, use the higher rate."
The second variable in determining auto premium is the location in which the vehicle is garaged. Garaging location is defined as "the place where the vehicle usually stays each night," which is not necessarily the location of the company's main office. The insurance industry has divided states into territories and developed rates for each territory. The state of Minnesota, for example, has 19 different territories, resulting in 19 different rates for garaging locations. More populated areas will drive premiums higher. I recommend that you review the garaging location for each vehicle annually to make sure that you are achieving the lowest possible rate.
The third variable used to determine auto premium is the radius of operation for each vehicle. This determines the distance surcharge for each auto. The surcharge classifications are: Local, Intermediate, and Long Distance. The more local a vehicle's usage is, the lower the premium; the longer the distance a vehicle travels, the higher the surcharge will be. To avoid unnecessary surcharges, make sure that your vehicles are being properly classified according to the distance they travel.
The final variable determining auto premium is the gross vehicle weight, which is the manufacturer's capacity rating. The heavier the vehicle, the more damage it can cause, and the higher the surcharge will be. Heavier vehicles are also more costly to repair. There are four weight distributions for trucks and two distributions for truck-tractors. It is very important that your broker correctly identify the weight classification for each of your vehicles.
Vehicle use, garaging location, radius of operation, and gross vehicle weight are the four variables that affect the pricing of your auto insurance. As a business owner, you want to obtain the optimum coverage for your auto fleet at the lowest possible cost. I recommend that you spend some time looking at each of these variables in order to eliminate errors and achieve your lowest possible auto premium cost.