Insurance (Business Insurance)
Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss.
Insurance covers the following categories of risk:
- Financial risks which means that the risk must have financial measurement.
- Pure risks which means that the risk must be real and not related to gambling
- Particular risks, risks that are not widespread in their effect, for example such as earthquake risk for the region prone to it.
It is commonly accepted that only financial, pure and particular risks are insurable.
An insurer, or insurance carrier, is a company selling the insurance; the insured, or policyholder, is the person or entity buying the insurance policy. The amount of money to be charged for a certain amount of insurance coverage is called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.
The transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer's promise to compensate (indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated.
Business insurance can be any kind of insurance that protects businesses against risks. Business insurance is provided for the purposes of:
- Business Asset Insurance
- Commercial Property Insurance
- General Liability Insurance
- Product Liability Insurance
- Public Liability Insurance
- Statutory Liability Insurance
- Employers Liability Insurance
- Professional Indemnity Insurance
- Commercial Crime Insurance
- Business Continuation Insurance
- Trade Credit Insurance
- Rural Insurance
- Business Travel Insurance
- Commercial Vehicle Insurance
- Construction Insurance
- Corporate Insurance
- Marine Insurance
- plus Umbrella Policies
Insurance companies may be able to offer special expertise in specific industries, for instance:
- Insurance for trades
- Insurance for retailers
- Insurance for manufacturers
- Insurance for business services
- Insurance for marine cargo
- Insurance for mineral exploration
- Insurance for financial institutions
- Insurance for media companies
The insurer and or broker will need to know all material facts about your business in order to draft an adequate insurance policy cover that is appropriate for both parties. Non-disclosure of material facts, or false statements made to the insurer can oftentimes lead to the loss of policy cover.
It is important that clients read the fine print and are fully understanding their insurance contract; though insurance companies have some discretion over how they treat their client relationship, the norm is that the client will not be accepted again after three strikes in contravention of the insurance contract.
To illustrate the scenario above, here is a brief inhouse newsletter article:
Newsletter Article | "Read the Fine Print"
Source: Stuart Twaddle (Director), Insurance Resources Ltd.The Problem
Few People read contracts, not even those with sophisticated and highly qualified in-house legal facilities at their disposal. And almost every contract embodies one or more clauses, which will impinge on other contracts-especially on contracts of insurance, which themselves contain clauses that enable underwriters to avoid claims by reason of...
- Non-disclosure of material facts
- The exclusion of contractual liabilities
- Prejudice to the underwriter’s rights of subrogation
The following three true anecdotes illustrate the point.
The Lease
The policyholder in this instance was a national chain of retail stores with an in-house legal department, one of whose responsibilities was to vet all agreements.
A lease was entered into with a property owner which embodied a clause to the effect that the lessee-who was the sole tenant of the property-was responsible for arranging and maintaining in force throughout the duration of the lease, a policy of insurance covering the building against the risks of fire and allied perils. Naturally the implications of this clause were overlooked and in terms of Murphy’s Law, the building was extensively damaged by fire.
The Security Contract
“Help; I’ve signed my life away and you have to sort it out!”
These words greeted me early one morning over the ‘phone’. My client was the head of one of the prestigious law firms in the city, which allowed me to indulge myself in a snigger at the thought that even lawyers enter into contracts, which they don’t read.The contract was for a security firm to provide security at my client’s offices and contained the customary disclaimers in terms of which the law firm held the security organization harmless and indemnified in full if, in the course of their duties, they caused injury to any person or damage to any property.
It was a full week after the contract had been signed that the lawyer awoke to the implications of this clause on his insurance portfolio.
The Device
I was working overseas at the time I heard about “The Device”. It was a warning mechanism for aircraft engines, which was designed to cut out automatically prior to take-off. The national airline which undertook to test this technological innovation entered into an agreement with the manufacturer of the device which placed the entire test risk on the shoulders of the airline and held the manufacturer harmless in the event of any defect in the device manifesting itself during the six-month trial period.
Neither the airline’s legal team nor their risk manager-who all vetted the contract-recognized the potential impact of the clause on their aviation insurance portfolio so no one bothered to notify the underwriters.
One can perhaps imagine the scenario had the device caused an aircraft engine to explode whilst on the apron to Heathrow or Kennedy airports during rush hour: -
- Damage to the aircraft itself
- Injury to passengers and crew aboard the aircraft
- Damage to other aircraft in the vicinity
- Injury to passengers and crew aboard those aircraft
- Damage to the airport
- Injury to ground crew and persons in the airport buildings
And an underwriter rubbing his hands with glee because he’s off the hook…
The Solution
- Read the fine print
- Read the fine print
- Read the fine print
- Notify your broker
You may have to pay more for your cover but you won’t have signed your life away!
