Introduction to Business Insurance

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What Is Business Insurance?

Business Insurance is a broad category of insurance coverages designed for businesses. It is also called Commercial Insurance. Businesses buy insurance to protect themselves against financial losses that result from lawsuits or physical damage to company-owned property. Insurance helps ensure that a business can continue to operate after a loss occurs.

Protects You Against Large Losses

Insurance protects businesses against catastrophic losses, such as a fire that destroys a building or an auto accident that generates a large liability claim.

In the absence of insurance, the financial consequences of such events could bankrupt a company.

Business insurance is not intended to cover small losses that a company can easily absorb. This is the reason many coverages are written with deductibles. An example is commercial auto physical damage coverage. If you buy collision coverage under a commercial auto policy, your insurer will not pay for a small "fender bender" loss that does not exceed your deductible.

There are certain types of risks that cannot be insured under standard insurance policies. Examples are earthquake and flood. These hazards require specialized coverage. Some risks cannot be insured at all. For instance, you cannot insure a building against damage caused by war.

Spread of Risk

The primary purpose of insurance is to spread risk. Every business faces the risk of a catastrophic loss. For each business, the odds of a major loss are small.

Yet, large losses do occur. A business protects itself by buying insurance. The business pays a premium, and in exchange, the insurer assumes the risk of large losses.

Insurance companies collect money from insurance buyers in the form of premiums. They invest that money so they can earn income on it.

Insurers are required by law to set some of their money as reserves. These funds must be readily available to pay future claims.

Insurance companies have developed loss prediction tools based on a mathematical rule called the law of large numbers. This law is essentially the idea that loss prediction becomes more accurate as the number of exposure units increases. That is, more loss data yields better predictions. For example, suppose an insurer is insuring six buildings. Because there are so few buildings, the insurer will be unable to accurately predict how many of them will sustain a fire loss within the next year. If the insurer is insuring six million buildings instead of six, its ability to accurately predict fire losses will be greatly improved.

Insurers collect and analyze loss data for each industry. They use historical loss data to predict future losses. Insurers uses this data to develop the rates they charge policyholders. Businesses in risky occupations pay higher rates than other businesses.

Steps to Buying Insurance

Buying insurance for a business is a process. You can facilitate that process by following these steps.

Educate Yourself
Before buying insurance, you should have a basic understanding of the types of policies that most businesses need. These include general liability, commercial auto, commercial property, and workers compensation policies. You need not understand all aspects of these policies, but you should know what purpose they serve. It may be helpful to ask other business owners in your industry what insurance coverages they purchase. 

Analyze Your Business
The next step is to assess your business to determine the coverages you will need. Prepare a written description of your business, explaining what is does and how it operates. Create a flowchart that describes each step of your operations. Make a list of the property your business owns.

Choose an Agent or Broker
Insurance is a people business. You'll need an agent or broker with whom you can develop a long-term relationship. This person should be a licensed professional with a good knowledge of insurance coverages. He or she should also understand the insurance marketplace. Give your agent your written description of your business. Provide any additional information he or she requests. The more your agent knows about your business, the better he or she will be able to meet your insurance needs.

Review Your Insurance Coverages Regularly
Your business isn't cast in stone. It will grow and change over time. Your insurance policies need to change as well. Meet with your agent or broker at least once a year to review your coverages. The best time to review your policies is several months before they renew.

Article edited by Marianne Bonner


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