In this edition of our client education series, Insurance Business explains how business insurance works. We discuss the types of policies available to companies. We also show how these policies can protect businesses from common risks. We also explore a key policy that has gained attention due to the pandemic: business interruption insurance.
We ask insurance agents and brokers to share this article with their clients. This will help clients understand which business insurance policies are important for their protection.
What’s the advantage of a business having insurance?
One key reason businesses benefit from insurance is that it provides financial security against unexpected losses. While carving out success paths, companies often land themselves into uncomfortable places that negatively affect profitability. Mistakes often land them hefty lawsuits, and accidents and calamities take away a massive chunk of their revenue. It is here that the right policies play a very important role in helping the business bounce back quickly.
Business insurance, although one of the ways a firm can minimize loss, it goes hand in hand with risk management practice. The best way for a business to protect its assets and finances is to combine insurance with good risk management. What kinds of business insurance policies should a business purchase?
Because of the diversity of risks and challenges encountered by every business, no one policy fits all needs. Instead, companies must have different types of insurance based on their business activities, size, and location.
1. General liability insurance
General liability insurance is also simply termed as business liability or public liability coverage. This type of insurance may protect a business from claims of bodily injury or property damage connected with business operations. Such a policy may even protect against reputational harm and copyright infringement.
2. Professional liability insurance
Also known as errors and omissions (E&O) or malpractice insurance, this coverage protects businesses from work-related claims. These claims can include mismanagement, sexual harassment, and discrimination.
This coverage makes it possible to handle charges legally. It helps settle issues like mistakes, contract breaches, incomplete work, and cost overruns.
This covers not only the directors and executive management but also other staff and the business itself. While it is not always required by law, many companies view this as important coverage. This is especially true for businesses that provide expert or advisory services.
3. Product liability insurance
For businesses that sell products, product liability coverage might be a good option. This covers the business from lawsuits filed by customers who claim losses or were harmed due to their product. The commercial insurance policy includes costs of legal defense and compensation if proven to have been faulted.
4. Directors’ and officers’ (D&O) insurance
D&O insurance, or D&O liability insurance, protects a company’s directors and senior management. It covers losses from professional liability lawsuits. This policy pays for financial losses from these lawsuits. It includes costs for settlements, fines, and defense expenses.
There are three primary types of D&O coverage, commonly referred to as insuring agreements or sides and varying levels of protection:
This insuring agreement protects against “non-indemnifiable loss” or more narrowly, situations in which the business is not allowed under law to indemnify its directors and officers-whether that’s because the business has filed for bankruptcy or for any other reason.
The most utilised insuring agreement, it reimburses a company after it has indemnified a director or other officer against loss, including defense costs, settlements and judgments.
Also referred to as entity coverage, this is direct coverage for a business when the company and its directors and senior management are named in a lawsuit.
Commercial property insurance
Commercial property insurance, also known as business property or commercial building insurance, is designed to minimize disruption to a company’s day-to-day operations by providing compensation for damages or losses that happen to the following:
Property or building the business operates in
Equipment and technology the company uses
Inventory of products and materials the business stores and sells
Some policies also pay out a portion of lost income if the damage prevents a business from conducting its usual operations. Business property coverage is often a requirement for commercial leasing arrangements.
Health insurance
The Affordable Care Act (ACA) mandates the coverage of health insurance by employers with more than 50 employees that are not part time. The ACA also offers SHOP (Small Business Health Options Program) coverage for those who have less than 50 workers.
Workers compensation insurance
Workers’ compensation insurance, commonly referred to as workers’ comp coverage, pays for the cost of medical care and part of lost income for any employee who falls ill or gets injured when doing his or her job. It also protects the business from financial liability because it eliminates having to pay for costs such as work-related illnesses and injuries from personal pockets.
Workers’ compensation insurance policies provide several different coverages, including:
Medical costs:
Provides medical treatment for the ailing or injured employee.
Lost earnings: Losing the income earned:
Compensation that, in some form and part of the employee’s wage, is paid because the employee needs to work less or not at all because of the illness or injury they acquired through their work.
Continuous treatment:
In cases wherein a work-related injury or disease causes an employee to need medical treatment for more extended periods, rehabilitation costs are covered.
Disability benefits:
It covers medical costs and part wages lost by employees who fall incapacitated in the event of an accident at the workplace.
Death benefits:
It covers funeral and burial expenses and also provides financial support to the beneficiaries of employees who die from a work-related injury or disease.
Business interruption insurance
Business interruption insurance, also referred to as BI or business income coverage, is meant to insulate enterprises against loss of financial value caused by the loss of capacity to operate, which is due to an insured peril. We will expand on this type of policy in our coverage highlighted below.
First-party coverage
This type of coverage pays out the financial losses that a business suffers owing to a cyber incident, which includes;
Cost of response to a data breach
Cost of recovering or restoring lost or corrupted data
Lost revenues due to loss of business
Extortion from ransomware attacks
Future cyberattack risk assessment
Cost of notifying customers of the cyber incident
Third Party Coverage
It gives coverage for lawsuits by third parties including customers, employees, and vendors on damages incurred against the business as a result of a cyber attack. Policies differ as most of them cover court and settlement fees in addition to regulatory fines.
What are the biggest risks businesses are now facing?
Annual poll: As a risk insurer, Allianz surveyed thousands of companies from nearly 90 countries and over 20 industries last year to find out what risks these businesses feared most challenged their operations.
Here are the top 10 biggest risks facing businesses globally, according to Allianz’s latest Risk Barometer report:.
Cyber incidents – including cyberattacks, IT failure or outage, data breaches, and associated fines and penalties.
Business interruption – including supply chain disruption
Natural catastrophes – including storms, flooding, earthquakes, wildfire, and other weather events
COVID-19 outbreak – including health and workforce issues, and restrictions on movement
Changes in legislation and regulation – including trade wars and tariffs, economic sanctions, protectionism, Brexit, and Euro-zone disintegration.
Climate change – including physical, operational, financial, and reputational risks associated with global warming
Fire and explosion
Market developments – including volatility, increased competition and entry of new players, M&A, market stagnation, and market fluctuation
Shortage of skilled labor
Macroeconomic developments – monetary policies, austerity program, rise in commodity prices, deflation, and inflation
Coverage highlight: Business interruption insurance
The pandemic has thrown into high relief this kind of coverage, which, however, is at the center of disagreement between insurers and policyholders. At its core, BI cover is coverage designed to protect businesses from loss of income or additional costs if forced to close their operations due to an unexpected event. Loss, however, should be caused by “material damage to property.”
How does business interruption insurance work?
Business Interruption insurance gives a company monetary cover for the losses they incur from an Insured event disrupting the normal conduct of their business. It restores the costs of running the business as it remains closed.
These include;
Lost income
Mortgage or commercial space and rent
Pay on a commercial loan
Wages of employees
Taxes
There are also policies that encompass added costs such as those incurred during the shutdown like those associated with the creation of a temporary location or the training of employees to operate new equipment.
In smaller and medium-sized firms, BI coverage typically occurs in a business owner’s policy that combines various coverages businesses require, including general liability, commercial property, and workers’ compensation cover.
Business interruption policies usually have a waiting period of 48 to 72 hours. This is evidenced by the policy’s restoration period, which lasts for an initial period of 30 days before it can be extended up to as long as one year.
What are the top causes of business interruption?
A leading insurer, AGCS, said in a five-year analysis of insurance claims that fire and explosion took the top position in causing business disruption around the globe, with 30%, or $6.7 million worth, of all BI losses.
A close second in the tally were storms at 21%, water damage at 12%, machinery breakdown at 5%, and flooding at 4%.
More respondents said cybercrime, fueled by the recent spate of ransomware attacks, was the one they feared the most, followed by natural catastrophes (36%), pandemic outbreaks (35%), and transportation and shipping disruptions (30%).
Does business interruption insurance cover COVID-19-related losses?
Whether to cover losses resulting from the coronavirus pandemic or not remains one of the big controversies between insurance companies and businesses affected by it. The insurance fraternity has always argued that pandemics lie outside the insured perils because their impact is enormous.
“Pandemics are an extraordinary catastrophe that can affect nearly any economy in the world, so it is difficult to predict and manage the risk,” said Sean Kevelighan, chief executive officer at the Insurance Information Institute (Triple-I), in a 2020 statement. “Pandemic-related losses are not covered by standard business interruption policies. This is because they impact all businesses at once.”
However, this has prevented businesses bringing claims with the argument to litigation, forcing them to use the courts. According to the COVID-19 coverage litigation tracker conducted by the University of Pennsylvania Carey Law School, over 2,300 cases had been filed regarding business income coverage, where most lawsuits come from food services businesses.
Last year at this time, the UK Supreme Court rejected appeals by insurers in a test case brought by the Financial Conduct Authority (FCA) on behalf of policyholders. They had argued that many BI policies did not cover wide-scale disruption caused by the lockdown measures taken by the government to curb the spread of coronavirus across the nation in 2020.
After considering non-damage insurance policy clauses, that is, disease clauses, denial-of-access-to-business-premises clauses and hybrid clauses, the Supreme Court dismissed all of the appeals unanimously, with far-reaching implications throughout the global insurance world.
What companies must know when they acquire a policy covering business insurance?
There are various considerations that companies have to consider before acquiring a business insurance policy. Those are;
The form of business structure
The industry in which the business operates
The type of risks the business is exposed to
The staff size or number that the company has
Whether the business has fixed addresses or vehicles
The stock, equipment, and tools that the business owns
It would be advisable also for businesses to seek advice from an experienced insurance agent or broker, who will advise them on what coverages are best suited to them. Click for more