business insurance

Businesses face different types of risks. These risks include accidents, thefts, fire outbreaks, and many others. Some of these potential hazards can destroy a business, while others can cause serious damage that is costly and time-consuming to repair. Therefore, businesses must protect themselves against the risks and possible collapse of their business.

LEARNING OBJECTIVES

By the end of this topic, you should be able to:

• Describe business insurance
• Explain types of business insurance
• Discuss the importance of business insurance
• Describe management of business insurance

Regardless of its size, every business must have an insurance policy. Some insurance policies are compulsory by law, for example, property liability or workers' compensation, but others are optional like flood insurance.

WHAT IS BUSINESS INSURANCE?

Business insurance is an agreement between an insurer and a business against common risks. Business insurance cover aims at protecting businesses from losses that may arise from events that can occur during the normal running of the business. Business insurance includes coverage for the damage of property, risks related to employees, and legal liability.

Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company.

Businesses evaluate their needs for insurance on the basis of potential risks. These risks may vary depending on the area of business operation.

It is important for small and medium business owners to attentively consider their business insurance needs. This is because the occurrence of a risk in a small business without insurance against the risk can cause devastating financial effects. If a business owner feels that he/she cannot effectively assess the risks of the business that need coverage, he/she should consult a reputable and licensed insurance broker for help.

TYPES OF BUSINESS INSURANCE

• Professional liability insurance. It refers to an insurance policy taken by professionals like lawyers and accountants to protect them from negligence as well as other claims that can be initiated by their clients. Professionals with a certain expertise in given areas need this insurance cover because it is the only insurance cover that offers protection against claims that may arise from professional practices like malpractice, negligence, and misrepresentation.
• Property insurance. This policy covers equipment, furniture, inventory, and signage in the event of theft, fire, or storm. However, this policy does not cover events of mass destruction like earthquakes and floods. You should also note that expensive private property is also not covered under this policy.
• Product liability insurance. This policy cover is very important for businesses that manufacture products and sell. Product liability insurance coverage protects a business in the event it is sued due to damages resulting from its products.
• Vehicle insurance. All vehicles used in businesses should be insured. The third-party policy is mandatory. This protects against legal liabilities in case of an accident.
• Business interruption insurance. This is a type of insurance that is mainly applicable to companies requiring a physical location to run their business. These include manufacturing facilities and retail stores. This policy compensates businesses for lost income during events causing disruption to the normal running of the business.

IMPORTANCE OF BUSINESS INSURANCE

The importance of business insurance includes:

• The uncertainty of business loss is reduced. Business insurance insures businesses against loss. A business that is insured increases the confidence of investors.
• Business efficiency is improved. When a business owner is free from worries associated with occurrence of risks, he/she is able fo focus more time on the business.
• Credit is enhanced. It is easier for an insured business to take a loan as it can use the insurance policy as collateral.
• Business continuation is enhanced. Some business risks have the ability to bring a business to closure if they occur. Business insurance allows the continuation of a business in case such a risk occurs.
• The welfare of employees is improved. Insurance helps the welfare of employees by provision for disability, provision for old age, and provision of early death insurance. When employees are assured of the above benefits, they will devote their time and effort to do the job.

MANAGING BUSINESS RISKS

Running a business attracts a lot of risk. Some risks can cause costly damage to a business while others can completely destroy a business. Despite the risks being implicit, people in business can anticipate and prepare for risks. The first step to managing business risks is identifying risks.

Identifying risks. If a business can predict when a certain risk will occur, it can be better prepared to minimize the impacts caused by the risk. Strategies applied to identify business risks depend on comprehensive analysis of the activities of a business. Many businesses face risks that are preventable, and that can be managed through reduction, transfer, acceptance, or elimination. Risk management consultants can assist a business to determine which risks to cover through insurance.

Risk assessment. After identification of risks, prioritization follows according to probability assessments. For example, risks can be; very likely to occur, have some chance to occur, have a small chance to occur, or have very little chance to occur.

Insuring against risks. Many business risks are insurable. Fire insurance is important for every business occupying a physical space. Product liability insurance is not useful for a service business.

Summary

• Business insurance can be simply defined as an agreement between an insurer and a business against common risks.
• Business insurance includes coverage for the damage of property, risks related to employees, and legal liability.
• Despite business risks being implicit, people in business can anticipate and prepare for risks.