Ask any Tennessee security company owner what keeps them up at night and they’ll give you one of two answers: finding officers or paying for insurance. In 2021, the insurance answer is winning.
General liability premiums for Tennessee security companies have increased 15 to 25 percent over the past 18 months. Workers’ compensation rates are up 10 to 20 percent. Professional liability, the coverage that protects against claims of negligent security, has seen some of the worst increases: 20 to 30 percent for companies with armed programs.
These aren’t abstract numbers on a balance sheet. They flow directly into what clients pay, how companies price their services, and whether smaller firms can stay in business at all. The insurance squeeze is reshaping the Tennessee security industry in ways that will outlast any single policy renewal cycle.
What’s Driving the Increases
Insurance underwriters price risk based on claims data, and the claims data for security companies has been ugly.
Three categories of incidents drive the bulk of security industry claims in Tennessee. The first is on-the-job injuries to officers. Security work carries inherent physical risk: assaults on officers, slip-and-fall injuries during patrols, vehicle accidents during mobile patrol shifts, and repetitive stress injuries from standing for 12-hour shifts. Workers’ compensation claims from these incidents have trended upward nationally, and Tennessee is no exception.
The second category is third-party liability, claims filed by people other than the security company’s own employees. A visitor to a property who gets assaulted in a parking lot where a guard was supposed to be patrolling. A trespasser who gets injured during a confrontation with a security officer. A tenant who sues a property owner and the security company after a break-in at a building that was supposed to be under guard protection. These claims are expensive to defend even when the security company did nothing wrong, and they can be catastrophic when a jury finds liability.
The third and most expensive category involves firearms incidents. Any time an armed security officer discharges a weapon on duty, whether the shooting is justified or not, the insurance consequences are severe. Defense costs alone for a shooting incident routinely exceed $100,000. If the case goes to trial and the verdict goes against the company, settlements and judgments can reach seven figures. Underwriters have gotten very selective about which armed security programs they’ll cover and at what price.
A Chattanooga-based insurance broker who specializes in security industry accounts told me that he’s seen three carriers exit the security market in Tennessee over the past two years. “They looked at the loss ratios and decided the business wasn’t worth it,” he said. “Fewer carriers means less competition, which means higher prices for everyone left in the market.”
The Armed Guard Insurance Problem
Armed security programs face the steepest insurance cost increases, and those increases are pushing some companies out of the armed business entirely.
General liability policies for armed security operations in Tennessee now commonly cost $20,000 to $50,000 annually for a midsize company (30-100 officers). That’s the baseline, before adding umbrella coverage, which most clients require. Umbrella policies adding $1 million to $5 million in additional coverage can cost another $10,000 to $30,000 per year.
Workers’ compensation for armed officers carries its own premium structure. The NCCI (National Council on Compensation Insurance) classification code for armed security guards carries a higher base rate than unarmed guards. In Tennessee, the rate differential means an armed officer generating $40,000 in annual payroll might cost the employer $4,500 to $6,000 in workers’ comp premiums, compared to $2,500 to $3,500 for an unarmed officer at the same pay level.
One Memphis company owner shared his numbers with TN Security Review. His armed program covers 22 officers across eight client sites. His annual insurance costs specifically attributable to the armed program: $38,000 in general liability, $14,000 in umbrella coverage, and roughly $45,000 in workers’ comp attributable to armed officers. Total: approximately $97,000 per year, or about $4,400 per armed officer annually.
“That $4,400 per officer has to come from somewhere,” he said. “It comes from the billing rate. Which means my armed rates have to be higher than companies that are cutting corners on insurance. Some clients understand that. Some just go with the cheaper bid and don’t ask about coverage.”
How Costs Flow Through to Clients
Security companies operate on relatively thin margins. Industry analysts typically cite net margins of 5 to 12 percent for contract guard companies, with most Tennessee firms falling in the 6 to 10 percent range. When insurance costs jump 20 percent, that margin can disappear entirely unless the company raises its billing rates.
The math works like this. A security company billing a client $22 per hour for an unarmed guard might have a cost structure that looks roughly like this:
- Officer wages and taxes: $14.50
- Insurance (GL, WC, umbrella): $2.00
- Overhead (admin, rent, technology, vehicles): $3.00
- Profit: $2.50
When insurance costs increase 20 percent, that $2.00 insurance line becomes $2.40. The profit drops from $2.50 to $2.10. That’s a 16 percent reduction in profitability on a line item the company can’t control.
Most companies respond by raising billing rates. The problem is that rate increases in the security industry face resistance from clients who are accustomed to treating guard services as a commodity. Property managers compare three bids, pick the cheapest one, and switch companies when the contract comes up for renewal. Raising rates risks losing the account to a competitor willing to operate on a slimmer margin.
Companies with strong client relationships and differentiated service offerings have more room to push rate increases through. Companies competing primarily on price find themselves trapped between rising costs and clients who won’t pay more.
The Lawsuit Environment
Tennessee’s legal environment for security companies has gotten more challenging, and that’s a factor in the insurance pricing.
Negligent security lawsuits, where a crime victim sues a property owner and the security company for failing to prevent the crime, have become more common and more expensive to defend. Plaintiffs’ attorneys have gotten skilled at arguing that a security company’s failure to patrol properly, respond quickly enough, or staff a post adequately constituted a breach of duty that contributed to the plaintiff’s injuries.
Tennessee follows a modified comparative fault standard, meaning a plaintiff can recover damages as long as their own fault doesn’t exceed 50 percent. In a negligent security case, the security company might share liability with the property owner, and both parties’ insurers end up writing checks.
A few specific incidents have influenced Tennessee security insurance pricing in recent years. A shooting at a Memphis nightclub that resulted in a wrongful death suit naming the security company. An assault at a Nashville hotel where the plaintiff argued that the single guard on duty was insufficient for the property’s known crime risk. A workplace violence incident at a Chattanooga industrial facility where the security officer on site was alleged to have failed to follow established protocols.
Details of settlements in these cases are mostly confidential, as is typical. Insurance brokers familiar with the cases suggest settlement amounts in the low-to-mid six figures for each. When three or four cases like that hit within a few years in a single state, underwriters recalculate their risk models for the entire market.
Smaller Companies Feel the Squeeze
The insurance cost spiral hits small security companies hardest for a straightforward reason: insurance costs have a substantial fixed component that doesn’t scale down proportionally with company size.
A 15-officer company and a 150-officer company might pay different total premiums, certainly. The per-officer cost, however, is often higher for the smaller firm. Insurers view small companies as riskier because they have less management infrastructure, thinner financial reserves, and fewer policies to spread across their book. A single bad claim can represent a much larger percentage of a small company’s total premium base.
Several Tennessee security company owners with fewer than 25 officers reported insurance costs consuming 12 to 18 percent of their gross revenue. For comparison, larger companies typically manage to keep insurance costs at 7 to 10 percent of revenue. That differential puts smaller companies at a structural disadvantage on pricing.
Some small firms have responded by raising deductibles, effectively self-insuring for the first $5,000 or $10,000 of any claim. This reduces premium costs in the short term and increases financial exposure if a claim actually occurs. A $10,000 deductible on a general liability claim is manageable for a company with strong cash reserves. For a company running payroll week-to-week, one claim at that deductible level could cause a cash flow crisis.
Others have explored alternative insurance structures. A group of four small Nashville-area security companies investigated forming a risk retention group (RRG) in 2020, essentially pooling their insurance risk. The legal and administrative costs of establishing the RRG proved prohibitive for companies their size, and the effort stalled.
Industry Consolidation Pressure
Higher insurance costs are one of several factors pushing the Tennessee security industry toward consolidation. When a 20-officer company faces an insurance renewal that eats another 3 percent of gross revenue, the owner has to ask whether the business remains viable at that scale.
Some sell out. Larger regional firms and national companies have been acquiring small Tennessee guard companies for years, and the pace has picked up in 2021. Allied Universal’s merger with G4S, completed earlier this year, is the most prominent example at the national level. At the state level, several small Tennessee firms have been absorbed into larger regional operators over the past 18 months.
Others simply close. The Tennessee Secretary of State’s business filings show a noticeable uptick in security company dissolutions and administrative closures in 2020 and 2021. Not all of these are insurance-related, certainly. COVID contract losses, staffing shortages, and personal decisions all play roles. Insurance costs, however, come up repeatedly when former owners describe why they exited the business.
The companies that survive and grow tend to share certain characteristics. They maintain clean claims histories by investing in training and supervision. They carry adequate coverage and factor the full cost into their billing rates rather than competing on artificially low prices. They build client relationships based on service quality rather than price alone, which gives them room to pass through cost increases.
“Insurance is a cost of doing business, and you have to treat it that way,” said a Knoxville company owner who has operated for over 15 years. “The companies that fail are the ones that buy the cheapest policy they can find and then act surprised when they get canceled after a claim. You get what you pay for in insurance, same as anything else.”
What Comes Next
Insurance industry analysts don’t expect relief in 2022. The factors driving premium increases, an active claims environment, carrier exits from the security market, and rising reinsurance costs, aren’t going away. Most brokers are advising their security industry clients to budget for another 10 to 15 percent increase at their next renewal.
For clients of Tennessee security companies, that means billing rate increases are coming, whether companies announce them proactively or build them into contract renewals. The days of $16-18 per hour unarmed guard service in Tennessee’s major metros are probably behind us. Armed guard rates that were $22-25 per hour two years ago are heading toward $26-30.
The broader question is whether the insurance market is appropriately pricing the actual risk of security operations, or whether it’s overcorrecting based on a few high-profile claims. Security company owners overwhelmingly believe it’s the latter. Insurance underwriters would disagree. The truth probably sits somewhere in the middle, which is exactly where it always sits in arguments about insurance pricing.
What isn’t debatable is the impact on the ground. Tennessee security companies are paying more for insurance in 2021 than they ever have, and those costs are changing how the industry operates, who can afford to stay in it, and what clients pay for the officers standing in their lobbies and patrolling their parking lots.