Commercial Lines Insurance

There are two main types of insurance, with the first one being personal lines insurance, which individuals purchase to hedge against the risks of various events which may represent unacceptable financial burdens if they occur.

Businesses also require this sort of protection, which represents the second major category of insurance, commercial lines insurance. Included within this category is insurance that insurance companies themselves take out to protect themselves from unacceptable risk to them, called reinsurance, but we will be discussing that in a separate, dedicated article.

The way insurance works is that a certain risk gets sold to an insurance company, for a price, and in exchange the insurer will provide financial compensation to the insured if the insured event occurs. This involves a transfer of these risks from one party who are unable to manage the risks comfortably on their own, to one who due to their specialization in handling these risks are in a much better position generally.

It is never a good idea to insure against risks that you can manage yourself without much trouble or consequence, as overall we pay a premium for this protection, meaning that on a balance of probabilities it will cost you more to assign the risk and pay for the hedge, but the potential costs may be greater by assuming the risk yourself due to the impact of the event.

Why Business Insurance Often Makes a Lot of Sense

Business insurance can make this calculation even more clear due to the more financial nature of business. So if it costs more to insure against something, but if the event would cause the profitability of your business to erode, or maybe even put you out of business, it can be far more economical to pay extra for this protection.

The bottom line with all insurance though, including personal insurance, is that you want to avoid a situation where you are unable to cope with a given event, and it always comes down to a financial burden that is too great to bear.

With business insurance, it’s important that businesses not have their operations unduly affected, just like we don’t want to have our personal life unduly affected either, although with personal insurance, costs that aren’t monetary are going to often play a big role in the decision as well.

For instance you may not want to see your family living in squalor should you die prematurely and be unable to provide for them, so you may want to protect the risk to their standard of living by buying life insurance.

With business insurance, the focus is more on the monetary side of things, although if you own the business you may be protecting your standard of living as well should it suffer. So there’s not a lot of difference between the two really, they serve the same goals and seek the same protection basically.

The economic principle that applies to all insurance is that of diminishing marginal utility, where the first dollar is the most valuable and value declines as the amount increases. So when you spend money on insurance, this expenditure has less value to you dollar for dollar than the benefits received if a loss occurs, because the replacement value of the loss is greater dollar for dollar than what could be considered excess dollars expended.

So with business insurance, we could put this as a business spending part of their profits to buy insurance to protect the ability to generate future profits, and if they suffer a significant loss that isn’t compensated for, this could have negative consequences for some time and maybe even permanently.

So some may wonder why large businesses in particular could not handle on their own some of the things that they insure against, and in some cases they might, but this may still end up reducing their profitability such that the insurance becomes the better bargain.

Commercial Liability Insurance

While there are several categories of business insurance, the most important thing that is insured here is the ability to take risks to generate profits. Going into business is risky enough as it is, without adding additional risks that can be offset with insurance.

So without insurance, a lot of business activities that are successfully conducted may end up presenting unacceptable risks overall, and this would cause people to refrain from entering into these businesses to some degree.

A good example of this would be with a medical practice, and if a medical doctor had to worry about being wiped out by lawsuits, and the risk of this would be unacceptably high, as it is in practice, then some doctors would get discouraged by this. This could result in an undersupply where people would need a doctor and perhaps couldn’t get one.

So they take out malpractice insurance to guard against this, as even very good doctors can get sued, and even if you win, this can involve significant legal expenses in defending oneself. This adds expense to practicing, but at the same time allows it to a large degree.

Liability insurance overall represents a significant segment of commercial insurance, and businesses of all forms need to protect themselves from legal risk. Individuals also purchase liability insurance of various forms, but this is even more important to businesses as they generally have much greater liability exposure than individuals do, meaning that they are more likely to be sued.

Commercial liability insurance covers a broad range of categories, including things like negligence and recklessness, which can be a particular concern when you take on the liability of the work of others who you may only have a limited degree of control over. A business wants to protect themselves against all potential incidents and commercial liability insurance provides this protection to them.

Commercial Property Insurance

Businesses also need to protect their property, just like individuals do, and in the event of loss due to fire, natural disasters, theft, or other circumstances that result in a property loss, they want to be covered for this. Just like individuals, businesses have financial obligations that must be met, and especially since they tend to be highly leveraged, borrowing money to be used in their business that must be paid back in a timely manner.

So if too many resources were diverted to cover larger losses, of any sort, then this may impact their business negatively, especially their ability to meet their financial obligations. and therefore they will want to seek to avoid this.

Protecting one’s credit is important enough for individuals, but this is much more the case with businesses, it is vital actually, as erosion of credit can damage a business severely, even spelling doom for them.

Commercial property insurance covers a wide range of assets and perils, anything from a building burning down to a ship being lost at sea and its losing its cargo, to machinery at a factory being misused by its operators and becoming damaged.

Businesses also purchase loss of use insurance, where they can receive compensation for not only the lost or damaged property, but the loss of business that may result from it as well. In this case, the historic records of the business would be used to determine the amount of income lost from a given peril.

Other Types of Commercial Insurance

Since businesses employ people, they also require insurance which protects themselves against claims made by them. So if someone becomes injured on the job then they may be exposed to risks here, and this type of insurance is mandatory in most countries as well. Governments want workers protected, and unless the business is in an area which very lax employment standards, this is something they will need, and they should want as well.

It is generally in the interests of a business to want to have its employees to be protected with health insurance, and in countries such as the United States that does not have government provided health insurance, it is often in the interests of both the business and their employees for the business to negotiate group health policies for their workers.

Employees often represent a significant investment for businesses, and ensuring that they get adequate health care Is seen as a benefit to both the worker and the business. Group policies are also available at a lower cost than could be had by the employees purchasing the policies individually, so this indeed can be seen as a real benefit to workers, provided that they would have purchased this coverage anyway.

Like personal insurance, commercial insurance is very much tailored to the individual circumstances of the business, and the main reason for this is that each business, like each person, has various insurance needs and represents particular risks that are sought to be covered.

Given the larger policies that businesses tend to purchase with commercial insurance, this requires even more attention be paid to the actual risks involved, but insurance companies are well up for the task, with an array of people who specialize in assessing and pricing these risks.

For all of this to work, the insurance companies need to be profitable as well, and it’s even more important to get this right with commercial lines, as the sheer amount of the potential claims can be pretty high indeed. These means that the companies need to be even more diligent, which is indeed the case with these policies, requiring that they be even more tailored to the circumstances.

Commercial lines aren’t just for big companies, and even a small home based business may want to consider purchasing it. If protection is needed, and a lack of protection is an issue, then purchasing insurance of any variety can be a wise choice indeed.

Commercial lines represent an integral component of most businesses, and this plays a pretty big role in ensuring the smooth operation of business in general.