Insurance: What’s Available, What It Does and Why You Need It

The Insurance Information Institute said it best in Sharing the Risk:

"Our society could hardly function without insurance. There would be so much uncertainty, so much exposure to sudden, unexpected and possibly catastrophic loss that it would be difficult for anyone to plan with confidence about the future. Most importantly, it would be difficult to obtain credit or financing since few lenders or investors would be willing to risk funds without a guarantee of safety for their investments."

What Insurance Is. At its most basic, it's the sharing of risk - the chance of loss - among many. Every person in the insured group pays a small, known fee - an insurance premium - to an insurance company in exchange for assumption of the risk of a large loss and a promise to pay in case of such a loss. Misfortunes that could be crushing to one can be made bearable to all.

How Insurance Benefits Society. Aside from protecting people and organizations from random loss that could be crippling or devastating, insurance companies play another important role in our society - they are an important source of capital. Insurance companies collect premiums and then invest the money so that it will grow and provide for the payment of future claims. They invest it - either directly through equity investments or indirectly through debt finance - in businesses, real estate developments and other ventures, and thereby contribute meaningfully to the growth and development of our economy.

Insurance Policy. It is a contract that legally binds the seller (insurer) and buyer (insured or policyholder) to specific obligations over a certain period of time. The insured is obligated to pay a premium and do certain things such as attempt to avoid loss and notify the insurer in a timely manner in case of a loss. The insurer is obligated to pay for losses if an event covered by the policy occurs when the policy is in effect.

Property Insurance. It covers property such as business, home, machinery, equipment, patent, automobile, boat, jewelry and art. The property insurance policy will list the property it insures or "covers." It also will state the perils that insured property is covered for. In most cases, the policy will cover loss that results from a wide range of perils, but policies also may be taken out to cover losses due to specific causes such as lightning or flood. Property insurance is referred to as first-party insurance because it covers loss suffered by the insured (first party) directly, such as damage to a home owned by the insured. The insurance company is referred to as the second party. Property coverage amounts are fairly easy to determine because replacement costs for tangible items can be estimated with some accuracy.

Casualty Insurance. It covers loss or liability arising from accident or mishap (excluding automobile). It includes, but is not limited to, employee liability insurance, workers' comp, public liability insurance, automobile liability insurance, burglary and theft insurance, personal liability insurance and professional liability insurance. Typically, casualty insurance covers damage to property and people. Casualty insurance that includes personal liability can be very useful for business owners because it ensures that the business will be able to take care of people injured onsite. Homeowners also can take advantage of casualty insurance to help them replace items stolen during robberies or to protect them from claims related to a visitor injured while visiting.

Liability Insurance. It pays for property damage or bodily injury that the policyholder may cause to others. Liability insurance is unique in that loss is determined after a finding of fault, such as through a court of law. Liability coverage amounts are a little more difficult to determine. What is the potential maximum exposure that a business owner has to a customer's claims that injury was caused by negligence on the part of the owner or his or her employees? Most liability policies do not cover libel and slander.

Business and Commercial Lines. These are for businesses, organizations and institutions, and include property, casualty, liability (professional and product), business income insurance, worker's comp, and in some cases, suretyship.

Personal Lines. These generally include insurance products designed to protect individuals from damage or loss that relates to their personal ownership of automobiles, homes (including contents), boats, motorcycles, etc. These policies typically provide coverage for damage, loss or theft of the insured assets, and liability obligations that might accrue to the owner.

Umbrella Policies. Given that general liability policies will place a cap on the amount of loss covered, coupled with the fact that juries are now granting awards of once unthinkable amounts, many business owners take out extra liability coverage in the form of umbrella policies. These policies cover claims that exceed the limits of their primary liability policy.

Deductibles. Property and casualty insurance virtually always calls for the insured to pay some portion of a loss or claim before the insurance company begins paying. In effect, the insured agrees to self-insure or fund losses up to a certain amount. Deductible amounts are typically negotiable between the insured (first party) and the insurer (second party). Higher deductibles typically result in lower premiums, and vice versa. In selecting the deductible amount, the insured must consider his or her financial ability to absorb loss, risk tolerance, expense structure, etc.

Suretyship. It is an insurance-like product that includes:

Surety: A policy whereby the insurance company guarantees that the insured will perform a certain obligation.

Fidelity: Often called "honesty insurance," a type of insurance that covers a business or organization against losses due to theft, embezzlement or fraud committed by an employee or employees.

Financial Guarantees: Cover the insured from loss from certain financial transactions such as a default on obligation (e.g., bonds or commercial paper) or loss that results from changes in law.

That's why every business owner should employ the specialized knowledge and experience of a commercial insurance broker. If your account is too small to garner the attention of a talented professional, pay them extra. It's that important. Tell them what you want and ask the terms they might be able to provide it under.

Insurance can be life-giving for you and your business, but a lot of money can be wasted on excess or inappropriate insurance, too. And risk exposures can be left insufficiently covered. Your job as a business owner is to get the job done right, economically. A basic understanding of insurance will help you.

Sources:

Sharing the Risk, Revised, Third Edition, Insurance Information Institute

Dictionary of Insurance, Lewis E. Davids, sixth revised edition