Insurance

Managing Business Risk

Ways to Manage Business Risk

Insurance is one mechanism for businesses to consider in managing business risk.

To properly manage risk, a company should evaluate whether it is a good option to obtain insurance. Insurance is used by companies to protect and cover the insured for certain types of losses. Therefore, a business should consider whether a certain type of loss is likely to occur, when or how often it could occur, and how serious the loss could be.

For example, if a company is headquartered in a hurricane-prone area, then it will likely obtain coverage for hurricane damage, flooding, or both. This type of coverage could very well be mandatory if a business has a mortgage from a federally regulated or insured lender. Even if it is not, the company will likely determine that paying the premiums for such coverage is more important than taking the risk of a hurricane putting them out of business. In other words, from a risk-management perspective, paying for hurricane coverage is a more shrewd business decision than going without coverage and risking what could be serious damage by a hurricane.

A similar analysis can be made for those living in California and dealing with earthquakes. An earthquake is likely to occur in certain parts of California, and the potential damage could be severe. Earthquakes are typically not covered under a general commercial policy. However, a business may purchase separate commercial earthquake insurance if it qualifies. Therefore, from a risk-management perspective, it would likely be in a business's best interest to obtain the appropriate coverage. The failure to do so could have serious and costly ramifications, which is a risk that that most businesses would likely see as not worth taking.

In today's gig economy, an independent contractor may be responsible for covering and insuring risks related to the performance of their job. For example, Uber drivers may be offered coverage for accidents under Uber's master auto insurance policies. However, many other start-ups in the gig economy may not extend coverage to such independent contractors, requiring these individuals to obtain their own insurance coverage.
Businesses need different insurance depending on their activities. For instance, a dry land farm might need to insure against hail, while a high-tech firm may need to protect against cyberattacks. And a trucking or taxi company would need collision insurance.

Types of Business Risk That Can Be Managed

The business risks that can be managed vary greatly. Insurance for these types of risks includes fidelity insurance, such as director and officer insurance, which protects the business from the breach of fiduciary duties owed by these people. It also includes life insurance on key employees or shareholders, which can fund replacements or buyouts.
Business leaders do their best to anticipate problems and evaluate risks. For example, director and officer insurance covers claims resulting from decisions and actions made by managers and directors that are a part of their jobs. This type of insurance, commonly known as errors and omissions insurance, covers defense costs and damages arising out of wrongful act allegations as well as claims or suits against the directors or officers of a company. This type of insurance allows the managers and directors of a company to make decisions and run the company without having to worry about personal liability, so long as their decisions relate to the job.

Key Employee Insurance Coverage

Key Employee Life Insurance The employer buys a life insurance plan that pays out if a specific employee dies.
Key Employee Death Insurance The insurer pays death benefits to the employer, which the employer uses to recruit a replacement.
Key Employee Retirement Insurance The employer uses the policy's cash value to pay the employee's retirement fund and to recruit a replacement.

Businesses face significant expenses if an essential employee passes away or retires. Key employee insurance coverage is a way to plan for that risk.

Key employee life insurance is a policy that protects a company in case one of its key employees passes away. For example, suppose a medical supply company's main salesperson suddenly dies. This could be devastating to the company, and it could result in lower revenues and lost customers while the firm struggles to find a replacement. With key employee life insurance, a payout could help the company deal with many of these problems, and that could help the business remain viable. This policy is also helpful when trying to obtain a business loan, as it is considered a business asset and helps a company's credit.