Insurance

Insurance

Insurance is a tool that individuals use to spread daily and lifetimes risks onto insurance companies who manage these risks. In essence, its the transfer of risk.  Insurance companies manage these risks by pooling the resources of the many to pay the claims of the few.

Definition of 'Insurance'

A contract (policy) in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients' risks to make payments more affordable for the insured.

Agreeing to the terms of an insurance policy creates a contract between the insured and the insurer. In exchange for payments from the insured (called premiums), the insurer agrees to pay the policy holder a sum of money upon the occurrence of a specific event. In most cases, the policy holder pays part of the loss (called the deductible), and the insurer pays the rest.

Types of Business Insurance

Insurance coverage is available for every conceivable risk your business might face. Cost and amount of coverage of policies vary among insurers. You should discuss your specific business risks and the types of insurance available with your insurance agent or broker. Your agency can advise you on the exact types of insurance you should consider purchasing.

1. General Liability Insurance: Business owners purchase general liability insurance to cover legal hassles due to accident, injuries and claims of negligence. These policies protect against payments as the result of bodily injury, property damage, medical expenses, libel, slander, the cost of defending lawsuits, and settlement bonds or judgments required during an appeal procedure.

2. Property & Casualty Insurance: Casualty insurance deals with policies that are written to hedge against the risk of unforeseen accidents. Some examples are insurance policies for auto accidents or losses incurred at sea (Marine Insurance). In general, casualty insurance hedges against risks associated with liability and crime.

3. Business owner’s policy (BOP): A business owner policy packages all required coverage a business owner would need. Often, BOP’s will include business interruption insurance, property insurance, vehicle coverage, liability insurance, and crime insurance. Based on your company’s specific needs, you can alter what is included in a BOP. Typically, a business owner will save money by choosing a BOP because the bundle of services often costs less than the total cost of all the individual coverage’s.

4. Commercial Auto Insurance: Commercial auto insurance protects a company’s vehicles. You can protect vehicles that carry employees, products or equipment. With commercial auto insurance you can insure your work cars, SUVs, vans and trucks from damage and collisions.  If you do not have company vehicles, but employees drive their own cars on company business you should have non-owned auto liability to protect the company in case the employee does not have insurance or has inadequate coverage.  Many times the non-owned can be added to the BOP policy.

5. Worker’s Compensation: Worker’s compensation provides insurance to employees who are injured on the job. This type of insurance provides wage replacement and medical benefits to those who are injured while working. In exchange for these benefits, the employee gives up his rights to sue his employer for the incident. As a business owner, it is very important to have worker’s compensation insurance because it protects yourself and your company from legal complications. State laws will vary, but all require you to have workers compensation if you have W2 employees.  Penalties for non-compliance can be very stiff.

6. Professional Liability Insurance: this type of insurance is also known as Errors and Omissions Insurance. The policy provides defense and damages for failure to or improperly rendering professional services.  Your general liability policy does not provide this protection, so it is important to understand the difference.   Professional liability insurance is applicable for any professional firm including lawyers, accountants, consultants, notaries, real estate agents, insurance agents, hair salons and technology providers to name a few.

7. Directors and Officers Insurance: this type of insurance protects the directors and officers of a company against their actions that affect the profitability or operations of the company. If a director or officer of your company, as a direct result of their actions on the job, finds him or herself in a legal situation, this type of insurance can cover costs or damages lost as a result of a lawsuit.

8. Data Breach:  If the business stores sensitive or non-public information about employees or clients on their computers, servers or in paper files they are responsible for protecting that information.  If a breach occurs either electronically or from a paper file a Data Breach policy will provide protection against the loss.

9. Homeowner’s Insurance: Homeowner’s insurance is one of the most important kinds of insurance you need. This type of insurance can protect against damage to the home and against damage to items inside the home. Additionally, this type of insurance may protect you from accidents that happen at home or may have occurred due to actions of your own.

10. Renter’s Insurance: Renter’s insurance is a sub-set of homeowner’s insurance which applies only to those whose who rent their home. The coverage is protects against damage to the physical property, contents of the property, and personal injury within the home.

11.Life Insurance: Life insurance protects an individual against death. If you have life insurance, the insurer pays a certain amount of money to a beneficiary upon your death. You pay a premium in exchange for the payment of benefits to the beneficiary. This type of insurance is very important because it allows for peace of mind. Having life insurance allows you to know that your loved ones will not be burdened financially upon your death. Life insurance deals with policies that are written to hedge against the risk of death, accidental death, and in some cases, sickness. In many cases, liability to the insurer is limited based on cases dealing with suicide, war, riot, and fraud.

12. Personal Automobile Insurance: Another very important type of insurance is auto insurance. Automobile insurance covers all road vehicles (trucks, cars, motorcycles, etc.). Auto insurance has a dual function, protecting against both physical damage and bodily injury resulting from a crash, and also any liability that might rise from the collision.

13. Personal Umbrella Insurance: You may want some additional coverage, on top of insurance policies you already have. This is where personal umbrella insurance comes into play. This type of insurance is an extension to an already existing insurance policy and covers beyond the regular policy. This insurance can cover different kinds of claims, including homeowner’s or auto insurance. Generally, it is sold in increments of $1 million and is used only when liability on other policies has been exhausted.

Features of Insurance

The decision whether to buy an Insurance policy now or later always confuses the people because at one hand you have to pay a premium which is an expense and on the other hand you have the benefit of your loss getting covered by insurance company in the event of any contingency. Before deciding whether to take insurance or not one should know the features of insurance, given below are some of the features of insurance –

1.    Insurance (excluding life insurance which tends to pay after certain period of time) is not an investment rather it is a hedge against the future probable losses.

2.    It gives you the comfort that in the event of any loss from unforeseen events will be compensated by the insurance companies.

3.    One has to pay premiums regularly to the companies providing insurance in order to enjoy the benefits of insurance.

4.    It can be of many types like life insurance, fire, marine, health insurance and so on and one can take any of the above polices depending on the risk with which an individual is exposed to.

5.    Insurance policies can be modified and offered to people depending on their risk profile and the need of the insurer.

6.    There is a limit to the amount by which an insurance company will compensate for the loss incurred by the insurer. The amount is mentioned in the insurance policy and the more the amount of insurance cover the more will be the premium which one has to pay to the company.

7.    A person can take more than one policy, in other words there are no restrictions on the number of policies, which one can take.

Functions of Insurance Companies

You might be wondering as you are facing another high insurance bill, why do we need insurance? It may seem as if the only function of insurance companies is to take your money, but that is not their only function. If you are to have a loss, all of those insurance premium payments will be well worth it. Insurance can serve as your umbrella against a storm of financial losses.

Restore Loss

An insurance company's main function is to restore you back to the condition you were in before a loss. Some people think if they have multiple insurance policies, they will get more money for an item. They are wrong. Over-insuring an item is a waste of your money. Insurance companies will not pay you for more than an item is worth. In the event there are more than one insurance carriers, the insurance will be paid based on the percentage of insurance. For example, if you break a vase worth $100 and own two policies each written to cover the full amount of $100, you will not get $200 for the vase. Instead, the first insurance company will cover 50 percent, and the next will cover the other 50 percent. Insurance will not let you profit from a loss.

Spread Risk

Another function of insurance companies is to spread risk. Reinsurance is when one insurance company will turn to another to spread risks over a set amount. Insurance companies wouldn't function after a natural disaster without reinsurance.

Protection

Insurance is paying for a certain set amount to protect yourself from having to possibly pay a higher amount. Some insurance companies started as a group of individuals who pooled their money to cover any disasters that might occur to the individual. It is a community mindset similar to barn raising in which a whole community would gather to help build a barn for one family. You pay a set premium amount for coverage you may not need, but if you do need it, the money is there.

Safety

Safety is a big concern for insurance companies. Insurance lobbyist campaign for changes to laws to ensure drivers are following safer driving techniques. The Insurance Institute for Highway Safety is a scientific and educational organization funded by insurance companies. Their goal is to reduce losses from auto accidents on the road.

Profit

Insurance companies care about your safety, but not from an altruistic point of view. An insurance company's main function is to make a profit. They are a business. This is one thing many consumers tend to forget. Drivers get upset if their insurance rates go up after too many not-at-fault accidents and say it is unfair for the insurance company to punish them when it is not their fault. What they fail to realize is, from a business prospective, a loss is a loss, regardless of who is at fault. If your driving behavior causes losses, your rates will go up to cover those potential losses. If your car is a magnet for hit and runs, your insurance company will raise your rates to protect against your pattern of losses. Is it fair? No, but it is good business.