Why Is It Useful To Have Insurance?

The basic purpose of insurance is to anticipate catastrophic losses that could financially impair your future. Insurance should not be purchased for small exposures as the cost of premiums is prohibitive and may waste dollars you'll need to cover your major exposures. Three basic procedures for determining your insurance needs are to eliminate or reduce your risk by properly managing maintenance, repair, training, and safety programs; assume the risk yourself by paying small losses and buying high deductibles; and transfer the risk by buying the proper amounts of insurance tailored to your specific needs.

A small business cannot operate without insurance. It allows owners to minimize risk of loss from circumstances beyond their control. The first step is to identify the risks of the business that need to be covered and determine the largest amount of possible loss.

Cause of Loss

The cause-of-loss form insures your property against all risk of direct physical loss, including the following: fire; volcanic action; smoke; sprinkler leakage; sinkhole collapse; explosion; vandalism; riot or civil commotion; lightning; windstorm or hail; aircraft or vehicles; glass breakage; damage from falling objects on the building exterior; damage to building walls or roof from the weight of snow, ice, or sleet; water damage caused by accidental discharge or leakage from a plumbing, heating, or air-conditioning system or domestic appliance; and the collapse of building walls or roof.

The following losses are excluded from the cause-of-loss form: mysterious disappearance of property; damage done to property being worked upon; artificially generated electrical currents; wear, tear, marring, or scratching; insects or vermin; dampness or dryness of the atmosphere; changes in temperature; rust or corrosion; theft from an unattended or unlocked auto; fidelity of an employee or officer of the bank; damage done by rain, snow, or sleet to property in the open; earthquake; flood (surface waters or water that backs up through sewers or drains); water below the surface of the ground, including that which exerts pressure or flows, seeps, or leaks through sidewalks, driveways, foundations, walls, basement floors, or any opening; and the explosion of steam boilers and steam pipes.

Coverage is provided on the basis of full replacement costs without deduction for depreciation on any loss, subject to the terms of the coinsurance clause. Since replacement costs fluctuate, you should constantly check your insurable values to make sure that you have adequate coverage.

Insurance Brokers

Brokers and agents are the retail side of insurance. Some insurers underwrite insurance only through brokers, who obtain raw data from layman customers and fill in the complex forms which insurers need in order to thoroughly assess the risk they are being asked to underwrite. Some jurisdictions have special rules about how policies must be printed, assembled, and delivered to insureds, and brokers are responsible for such compliance issues.

Most importantly, insurance brokers assist prospective insureds with developing risk management strategies appropriate to their risk profiles. They work with insureds to find out what kinds of risks they regularly encounter, and educate insureds about what policies are available for each type of risk. Often, an insured may buy a regular policy plus endorsements or additional policies to fill in exclusions in the regular policy.

Insurance brokers may also help insureds obtain multiple layers of excess and surplus lines policies from different insurers. The excess and surplus lines policies provide coverage over a primary policy, and can work through scenarios for reducing premiums with deductibles or self-insured retentions. For huge risks (e.g., the "slip and fall" risk of a multinational retailer with hundreds of stores), a single policy may not be available to cover the entire risk from the first dollar (or euro) of loss incurred. In the United States, if an insurance broker helps insureds obtain multiple layers of excess and surplus line policies, then the insurance broker also must be licensed as an excess/surplus lines broker.