Shawn has a masters of public administration, JD, and a BA in political science.
Businesses operate in a world of risk. One of the best ways to manage risk is through insurance. In this lesson, you'll learn about the types of insurance coverage available to businesses to help them manage their risks.
Insurance Coverage Defined
Meet Irene. She's a risk manager for a large corporation. She is responsible for researching, reviewing and recommending insurance coverage to help manage her company's risk.
Insurance is the transfer of a risk of loss from one party to another in consideration of a fee called an insurance premium. The insurance relationship is governed by the insurance policy, which is a contract between the insurer and insured party. An insurance policy will have a deductible, which is the money an insured party has to pay out-of-pocket before insurance coverage kicks in. The policy will have a limit or ceiling to the amount of loss it will pay.
Irene ensures that her company has sufficient casualty insurance to insure against risk of loss to persons and property. She'll want coverage against loss or damage caused by fire, theft, accidents and natural disasters. There are several types of casualty coverage that Irene must consider.
She needs to make sure the company has automobile insurance on all of its company vehicles to insure against damage to the vehicle as well as liability in case an employee causes an accident with a company vehicle.
She also needs to obtain property insurance, which provides coverage for the company's personal property and real estate. Personal property includes such things as computers, furniture, inventory, and equipment.
She'll want to make sure the company acquires title insurance when it purchases real estate to insure against any title defects in the property, such as claims of ownership, boundary line disputes, encroachments and unpaid taxes.
Workers' compensation insurance is also necessary to compensate company employees injured at work. Purchasing workers' compensation insurance is a no-brainer because it's required by law in most states.
Irene will also want to obtain liability coverage for the company to manage the risk of the company's negligence. She'll want to obtain general liability insurance to insure against the company's negligence in its day-to-day operations that result in injuries to customers, visitors, vendors and employees. For example, if a vendor slips and falls on a wet floor while making a delivery, the liability insurance will cover the loss due to the injury.
Irene will also want to obtain product liability insurance, which will provide coverage against loss or damage caused by the company's goods or services.
E&O Coverage and D&O Coverage
Irene also needs to consider the purchase of errors and omission insurance, also known as E&O coverage, and director and officers insurance, often referred to as D&O insurance. E&O insurance insures against the negligence of the company's professionals, such as its lawyers and accountants.
D&O insurance provides insurance coverage for the company's directors and top-level officers, such as the president. It provides protection for directors and officers for their liability related to poor management decisions, employee discrimination suits and shareholder lawsuits so long as the directors and officers acted in good faith. It will cover the costs of the litigation and payment of damages if awarded. Criminal matters are not covered.
Business Interruption Insurance
Irene must also consider business interruption insurance, which will replace business income when a company's business is interrupted by a casualty event. It's usually not sold separately but rather is attached to a property casualty policy.
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Irene's company is large and requires a large amount of cash coming in from revenue. If the company loses income even for a few days, the losses can be immense. Business interruption insurance makes sense for Irene's company.
Key Person Loss Insurance
Some companies, especially partnerships, depend on a few key people to be the life blood of its success. Problems arise if these key people die. First, it creates a vacuum of leadership that may be hard to replace. Second, oftentimes, the key person is a majority owner and will have heirs demanding control of the company, or a check, to be bought out.
Key person insurance is a type of life insurance taken out on the key person for the benefit of the company. If the key person dies, the company is paid on the policy. It will use the money for finding a new employee to replace the key person or buying out the ownership interest of the key person's heirs. Since Irene's company is large with many shareholders and isn't managed by one essential person, she doesn't see a need for this type of insurance.
Let's review what we've learned. Insurance is a means to transfer risk from one party to another in exchange for a premium. There are different types of insurance coverage.
Casualty insurance covers damages and loss to property and persons resulting from accidents and natural disasters. Examples include property insurance, automobile insurance, title insurance and workers' compensation insurance.
General liability insurance can be purchased to protect against losses due to the company's negligence in its day-to-day operations.
Product liability insurance can be purchased to protect against losses caused by defective products and services.
Businesses can also purchase E&O insurance to protect against the negligence of its professional employees and D&O insurance to protect against negligence of its directors and officers.
Business interruption insurance can be bought to replace income lost due to business interruptions, and key person insurance can be purchased in a case where a key employee or owner meets an untimely demise that could hurt the business.
Following this lesson, you should be able to:
Summarize the basics of how insurance works
Describe different types of insurance that a business can have
Identify the different types of casualty insurance
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