Insuring a brand-new business with no loss history

A new business can buy most commercial insurance without a claims history. Underwriters price it from the class of business, the size of its exposures, the owner's experience and the quality of its controls, and they usually charge as if the record were average or a little worse until there is data. Buy before you open, forecast your numbers honestly, and keep the paper trail, because the record you start building on day one is what earns better terms later.

What underwriters use when there is nothing to look back at

With an established account, the loss run does much of the talking. A new business has none, so the underwriter leans on other inputs:

• Class and operations. What you do, which hazards are involved, what you sell and to whom. This sets the class code and base rate.
• Exposure. The exposure base: sales for general liability, payroll for workers' comp, square footage for a building, vehicle counts for auto. These are your own forecasts, not facts, which is why audits exist.
• The owners' experience. Ten years running kitchens or crews tells an underwriter more than an entity formed last month. Resumes, licenses and prior-business loss runs help.
• Premises and controls. Location, building age and construction, alarm and sprinkler systems, safety programs, written contracts, subcontractor requirements, written procedures.
• Prior insurance. Whether you were covered before, and why a carrier dropped you if one did. A founder who carried coverage as a sole proprietor can often show that history even with a new entity.

Not all carriers want newcomers. Some standard-market appetites require a minimum number of years in business for certain classes, and others price new ventures in a separate program. If a standard insurer declines, the account may move to the excess and surplus market, where admitted-company filings do not constrain price or form (excess and surplus lines insurance explained). That is normal, not a mark against you, and the same business often moves back to a standard carrier after a clean few years.

Workers' comp: the mod starts neutral

For workers' compensation the mechanics are published. NCCI's experience rating plan produces a mod from the employer's own payroll and losses, and an employer gets a unity factor of 1.00 if, among other reasons, it is a new business with no data available to produce a mod (NCCI, *ABCs of Experience Rating*). The experience period is generally three years of data and it includes only policies with effective dates between 21 and 57 months before the rating effective date, so a new employer's first mod arrives after the policy has aged. Eligibility thresholds differ by state, and several states, including California, New York and Pennsylvania, run their own plans (see The experience modification rate (EMR) explained).

Until then your premium is the manual rate times payroll by class code, adjusted by any carrier credits. The way to hold it down is the same as for anyone else: correct classifications, an actual safety program and a return-to-work process. A bad first year enters your mod roughly two years later and stays in the calculation for about three years.

What to buy, and when

Do not wait for revenue. Construction and fit-out is the most exposed period for many new businesses: no sales to protect yet, but a large property investment, workers on site and nobody's coverage in place.

Forecast honestly, because the audit will check

New businesses estimate sales and payroll for the policy year. Lowballing lowers the deposit premium, but liability and workers' comp are normally auditable: the carrier reviews actual numbers after the term and bills or refunds the difference (premium audits: how they work and how to prepare). An understated estimate becomes a bill, and a pattern of understatement can lead to cancellation. Overstating is no good either, because you tie up cash. Use your business plan's real numbers, include seasonal staff and subcontractors, and revise the estimate mid-term if you grow faster than planned.

Claims-made policies and the retroactive date

Professional liability, cyber and D&O policies are usually claims-made. A new business's first policy usually sets the retroactive date at inception because the entity has no earlier work to cover. But if you did similar work before as an employee or under another entity, ask what prior acts are covered and whether an old employer's policy remains in force. Keep the retro date unbroken by renewing with the same carrier or by negotiating prior acts when you switch (prior acts coverage and retroactive dates).

Common mistakes

1. Insuring the wrong entity. The named insured should match the legal name on your leases and contracts. Starting as a sole proprietor and later forming an LLC means telling the carrier.
2. Skipping the application questions. Misstatements about your operations or experience can be grounds to void coverage (insurance applications: why accuracy matters and what misrepresentation costs).
3. Letting coverage lapse. A gap between policies hurts your ability to show continuous coverage and may leave claims uncovered.
4. Choosing by price alone. A cheap quote may exclude your main exposure or carry a high deductible. Compare quotes line by line.
5. Forgetting what the contracts demand. Landlords, lenders and customers often require specific limits and endorsements. Read them before the policy is bound (how to review the insurance requirements in a contract).

If you are buying an existing business

A purchase is different. The seller's loss runs show the business's real record, and the buyer's insurance has to start at closing. Ask for five years of loss runs on every line and read the exposures carefully (insurance due diligence when buying a business).

Building the record

Ask for a currently valued loss run from each carrier annually, and keep them (loss runs: what they are and how to request them explains how). After three clean years, you hold evidence that justifies a broker marketing the account to carriers that would not have written it at the start. A broker can show an underwriter your loss runs, your safety documentation and what you changed after any near-miss (how to prepare an insurance submission underwriters will read).

Key takeaways

• Underwriters price a new business from its class, exposures, owners' experience and controls rather than from claims history.
• Buy before you open, including during build-out; leases and contracts usually require proof of coverage before you occupy or start work.
• New employers start with a neutral 1.00 workers' comp mod, and the safety and classification work you do now determines the mod you earn later.
• Forecast sales and payroll realistically; audits reconcile the difference.
• Keep every loss run and renewal record, since they become your leverage after a few clean years.