Business insurance is designed to protect your company against insurable risk, or the likelihood of a loss. But it’s important to understand that even the most comprehensive insurance policies don’t cover every type of risk.
What is an insurable risk?
Insurable risks are risks that insurance companies will cover. These include a wide range of losses, including those from fire, theft, or lawsuits.
When you buy commercial insurance, you pay premiums to your insurance company. In return, the company agrees to pay you in the event you suffer a covered loss.
By pooling premiums from many policyholders at once, insurers are able to pay the claims of the few who do suffer losses, while providing protection to everyone else in the pool in case they need it.
What risks are not covered by business insurance?
The losses covered under small business insurance policies differ among insurance companies. For the best protection, it's wise to select the broadest coverage you can afford.
However, no insurance company will cover every risk. Some losses are simply impossible to value or too costly, too probable, or too susceptible to manipulation. These are known as uninsurable risks.
For example, most errors and omissions insurance policies won't cover you if a client sues you for not paying a bill or for stealing a customer or employee. And, of course, any allegation related to a criminal act or intentional wrongdoing on your part is generally uninsurable. For instance, if you intentionally damage your own property or injure someone, your insurance coverage won't apply.
Examples of insurable and uninsurable business risks
Consequential losses are also generally uninsurable. Let's say you're sued for a mistake you made while providing services to a client. Your policy will likely cover that. But if you lose that client as a result of your mistake and go out of business, those losses aren't covered.
Carriers also won't insure risks that are considered inevitable, such as providing property insurance to a business when a wildfire is burning just miles away. Additionally, they don't cover gradual damage related to maintenance or wear and tear, such as an old, leaky roof.
For a business risk to be insurable, it typically must meet a few criteria:
- The risk is potentially costly enough that a business is willing to pay a premium to protect against it.
- The risk can’t be so catastrophic that the insurer would never be able to pay for the loss.
- The risk is well-defined and has a clear, measurable value that can’t be influenced by the policyholder.
- The risk is random, not within the policyholder’s control, and the policyholder cannot cause or influence the loss.
- There must be a sufficient number of insureds subject to the same risk, so that all policyholders’ combined premiums can share in the cost of any losses – but it must be unlikely that all policyholders will suffer a loss at the same time.
Limitations of coverage
Ultimately, whether or not a specific risk will be insured is defined by the policy. Some types of high-risk occurrences may be covered, but only up to predetermined dollar limits.
Even within the same policy, different types of covered losses may have different limits or exclusions. There may also be limits on the total amount of covered losses that an insurer will pay.
Depending on the type of coverage, deductibles may also apply. For example, if your property insurance policy has a $10,000 deductible, the insurer won’t pay any claim less than $10,000, and will pay only for losses beyond the first $10,000. In other words, if a loss totals $30,000, the insurer will pay $20,000, and you will be responsible for the $10,000 deductible.
A policyholder may choose to pay a higher premium for insurance with higher payout limits and/or lower deductibles. They may also elect to pay lower premiums for a policy that provides lower benefits in the event of a claim.
Know your insurance policy
Be sure you understand your specific policy benefits, as well as what isn’t covered. With the exception of property coverage, the insurance company will generally not write a check to reimburse a customer (an insured) for their losses.
Additionally, liability insurance policies only cover the defense and settlement of claims filed against the insured. They do not pay for the costs when an insured sues another party.
Insurance is just one part of a comprehensive risk management strategy. You may need to employ other tactics to mitigate risk exposure.
For example, many small businesses make sure their client contracts include clauses to protect them from specific losses not covered by insurance. These may protect confidential business information, prevent a client from hiring away your employees, or prohibit them from redistributing software you license.
If you’re concerned about securing coverage for a specific kind of risk, contact a TechInsurance agent for an IT risk assessment to determine your risk exposure, learn what coverage options may be available, and receive a no-obligation quote to learn about coverage rates for the protection you need.
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