Insurance Basics: A Self-Help Approach
Understand what your coverage is all about

The next time you are faced with the annual task of reviewing your insurance, set some time aside to prepare for your renewal. The time you spend will be worth the money it could save you.

Your insurance agent will be able to walk you through the policy renewal. However, it’s important that you have a basic understanding of insurance. In this article, I will explain a few of the words and phrases used in insurance, briefly describe the general nature of property and liability insurance, explain how insurance benefits you and society, how insurance companies use premium dollars and, most important, create a list of tips for keeping your insurance premium costs down without jeopardizing your valuable insurance program.

Insurance terms are common words with special “insurance” meanings. For example:

Insurer. This word means the insurance company. When you read your policy, it will be referred to as “us” or “we.”

Insured. That’s you—the person, business or organization that is named in the declarations page and is protected by the provisions of the policy. In the insurance policy, it will refer to the insured as “you.”

Insurance. The word insurance refers to the entire system whereby the “risk” is transferred by the insured to the insurer by payment of an insurance premium. In return, the insurer promises to pay covered losses should they occur.

Risk. This term is used in several ways. It can refer to a chance of financial loss. Or, it may refer to the property being insured. It can also be used to describe the type of losses that are protected, such as when a policy provides special form or “risk-of-loss” coverage to pay for losses from events such as windstorm, fire, etc.

Transfer. The chance of loss is not eliminated with a transfer, but the financial impact of the loss is moved from one entity (you, the insured) to another (the insurer) based on your payment of a premium in return for a promise to pay losses.

Your agent will help you determine what coverage is available. You, on the other hand, will have to decide what is necessary, what is desirable and what is available but not needed by you at this time.

Two types of coverage that will be necessary and you will want to know more about are property insurance and liability insurance.

Property insurance. This covers accidental losses resulting from damage to property you own, use or are responsible for in the course of your business. It is reasonably easy to determine the amount of protection needed. You can make a list of the property at risk and identify its financial value either by what you paid for it or what it would cost you if you had to replace it.

If the loss is covered by the terms of the insurance policy, payment is made to you. If you have a loan against the damaged property, in most cases, the payment will include the lender as a payee to protect their financial interest along with yours. This is called indemnification. That means the payment is to put you back in the same financial position as if the loss had never occurred.

Liability insurance. If you are legally responsible to others because of negligence or failure to act in a reasonable manner, liability is designed to pay, on your behalf, the money you would owe to others if they suffer bodily injury or property damage. Your liability can be because of your ownership or use of premises or your activities in running your business. Liability can even result from your responsibility for injuries or damage caused by your employees when they are working for you.

The amount of liability insurance to purchase is more difficult than determining the amount of property insurance. You do not know how much someone could ask for in payment for his alleged injuries. You should always buy as much liability insurance as you can reasonably afford. You can never have too much. However, you certainly could have too little. The amount you can be held liable for is determined by what a court might allow.

Remember, your limit of insurance does not determine how much you will be responsible to pay. Your insurance carrier will pay up to the limit of coverage you purchase. Any amount in excess of that limit you are personally responsible for.

One final important word about your liability insurance—most policies provide defense cost coverage in addition to the limit of insurance you purchase. As you probably know, you can be sued for almost anything. Even if you are not legally responsible for damages, you still have to defend against the allegation. Your liability insurer will defend you and pay the costs of that defense.

Insurance is about the only thing you buy that you hope you never have to use. Even if you never have to use your insurance to pay claims, your insurance is still helping you and society in general. The business of insurance is not only for payment of claims.

In the insurance industry, through its efforts on behalf of consumers, you and others like you help to provide programs that are designed to prevent accidents. In addition, insurance provides billions of dollars that are invested in the worldwide economy. This money is held in trust for you, the policyholder, for payment of claims, if any. It is, therefore, available for investment until it is needed to pay claims. Insurance provides the financial stability needed for the support of credit. Without insurance, lenders would be unwilling to provide the finances for new or existing business or personal investment.

The most important by-product of the insurance industry is a good night’s sleep. Most of us simply sleep easier knowing we are not as likely to face a financial disaster because we were able to purchase insurance to protect our businesses.

Even though we recognize the needs of the insurance company to collect premiums to meet the expenses of paying claims, we know it is important that as business owners we keep our own premium costs down as much as possible. Here are a few common-sense steps you can take to help keep your premium costs in line:

• Choose the highest deductible you can possibly afford. Remember, some day you may need to pay your deductible, so be realistic.
• Don’t get unnecessary coverage. Buy what you need, at the levels you need. Your agent can help make you aware of the coverage available.
• Equip your business with the best protection systems possible for fire, burglary and any other relevant environmental danger. Insurance companies like to see that, and it can be the basis for better rates. It can even be the difference in whether insurance coverage is available or not.
• Equip business vehicles with anti-theft devices—the best ones you can afford. Also, check the driving records of anyone who will be driving your vehicles. If their records aren’t clean, your premiums will reflect that.
• In any construction projects or building upgrades, build with fire-resistant materials. Always use a licensed contractor who will be responsible for ensuring the work complies with codes and regulations. You should check with your insurance company before starting projects to ask whether discounts or premium reductions apply if you use certain materials or adhere to certain standards.
• Keep claims to a minimum by following loss-prevention guidelines from your insurance company and by holding safety training for employees and posting in your business safety reminders and rules.
• Protect against lawsuits (which can increase premiums). Put hiring and firing procedures in place, and carefully monitor and resolve complaints and discrimination or malpractice charges.

Hopefully, this information will help you understand how your purchase of insurance fits into the big picture. You are rewarded by better protection and lower costs when you develop an understanding of how important your activities are to your business and to the people it serves.

Scott Brothers is the President and CEO of Joplin, Mo.-based The Insurancenter, which has been serving the carwash industry since 1986.

Share this article: Email, Slashdot, Digg, Del.icio.us, Yahoo!MyWeb, Windows Live Favorites, Furl
Add this article feed to: RSS, My Yahoo, Newsgator, Bloglines

Read Comments [0]