Business insurance vs business needs

It may be a statement of the obvious but the way business is run today is rather different to the ways of two hundred and more years ago. We often forget the first insurance company was created in 1752 by Benjamin Franklin in Philadelphia. At that time, the main risk to any business was fire because, without alarm systems and rapid response pumping equipment, a building and stored merchandize could burn to ash before help arrived. The risk profile today includes fire but we have moved on to a much wider range of situations never dreamed possible by our ancestors. Can you imagine trying to explain the problems of a cyberattack and data loss? So, in our modern world, what is the best strategy for getting the best insurance portfolio?

The answer has not changed since the early days. When the Philadelphia Contributorship was the flagship for the new insurance industry, all the businesses involved complained about the amount they were having to contribute. It was ever the case the premium rate was the key. Business owners today are always looking for the best trade-off between the extent of the coverage and the cost. The fact the premium payments are a business expense and therefore a partly subsidized use of gross profit does not change the drive for every business to maximize its profit. So the directors of each company, regardless of size will be thinking about their exposure to risk and the economics of providing against the worst. The actual needs will vary significantly depending on the type of business. Particularly when the business is small, it is very important not to buy too much cover. The only heading on which no one should skimp is the cost of defending against third party litigation. Today, people use the threat of legal action as a means of gaining leverage over their opponents. Without insurance, it’s very expensive to get the right quality of legal advice to fend off nuisance actions. The scale of costs asked as an advance against attorney costs can make settlement of the claim look very attractive.

At this point, it’s appropriate to warn against one type of insurance as a one-stop solution. Many agents are advising small businesses to buy a Business Owner Policy (BOP). This is presented as an excellent deal for the replacement of property and equipment used in the business. As a package with a liability element, it looks like a cheap solution to the insurance problem. But, before you sign up for this type of policy, look very carefully at the extent of the cover. In a small wholesale or retail operation with no delivery service, BOP may fit. But the moment you send out employees to make deliveries, you are likely to hit problems because the standard BOP policy does not cover loss and damage caused by your employees, say, as drivers. So always ensure the insurance you buy fits your actual business needs. If you are at risk through vicarious liability, i.e. the potential negligence of your employees, buy the right business insurance coverage to meet your particular needs. Although there can be a temptation to buy the one-stop solution at a low price, cheap business insurances is often a false economy.

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