What is an Insurable Risk for Businesses?

What is an Insurable Risk for Businesses?

What is an Insurable Risk for Businesses?
Nick Gallo
Oct 5, 2022
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Business owners face many risks. They often rely on insurance companies to protect them from significant financial losses.

Unfortunately, not every circumstance is an insurable risk. Some hazards are beyond the scope of a policy’s coverage.

To help you develop an effective risk management plan, let’s explore examples of insurable risks and some ways to manage the ones that aren’t.

What is an Insurable Risk?

An insurable risk is covered by an insurance company. These risks include potential losses due to unexpected and unintended events, such as client lawsuits, accidental property damage, and medical bills for workers injured on the job.

Carriers generally insure risks when they believe they can charge high enough premiums to pay covered claims and profit. So, whether a risk is insurable depends primarily on the frequency of related accidents and the size of the resulting losses.

For example, a carrier insures a commercial building for up to $2 million in fire damage because only a small percentage of policyholders have incidents resulting in claims. The premiums the insurer collects exceed their projected losses even if they pay $2 million each time.

Types of Insurable Risks for Businesses

Insurers sort risks into two primary buckets. First, there are pure risks. They have no potential upside, and you can’t eliminate your exposure to them. For example, the chance of someone stealing your company’s car is a pure risk.

Second, there are speculative risks. They can result in either gains or losses, and you choose whether to expose yourself to them or not. For example, investing in the stock market is a speculative risk.

Generally, insurers only cover pure risks. In addition, they can only insure pure risks that result in reasonably predictable and measurable losses. That data is necessary to set appropriate policy premiums and pay out claims.

Three primary types of pure risk meet the criteria. They include the following:

  • Personal risks: Business owners and their employees face many physical hazards while fulfilling their responsibilities. Insurance carriers usually cover any loss of income or benefits they suffer due to illness or injury from their work.
  • Property risks: Businesses often rent or purchase property to facilitate their operations, such as equipment, buildings, and vehicles. Insurers are generally willing to cover damage to that property from causes like theft, accidents, and weather events.
  • Liability risks: Businesses are vulnerable to lawsuits from third parties, such as when their products or services cause someone bodily injury. Insurance companies usually cover the associated legal fees.

While you can generally find insurance coverage for these types of risks, there are always restrictions that may place certain losses beyond the scope of your policy. Ask your insurance agent for clarification before committing to a policy.

Examples of Insurable Risks 

Most businesses would benefit from personal, property, and liability coverage. Let’s explore some examples of each type of insurable risk to help you imagine the different ways they might apply to your company.

Personal Risks

A general contractor takes on a variety of construction projects. When clients require services outside of his expertise, he delegates the work to one of his employees who specializes in that area.

The general contractor and his employees face personal risks in this scenario. Construction often involves working with dangerous machinery in hazardous conditions, and physical injury could cause both parties to experience losses.

Property Risks

A landscaper specializes in renovating the backyards of single-family homes. He needs special tools and equipment to complete his projects and purchases the necessary machinery.

In this situation, the landscaper and his clients face significant property risks. If an accident were to occur during a renovation project, the landscaper could damage his equipment and his client’s residence.

Liability Risks

An office of Certified Public Accountants (CPAs) offers financial services to consumer and business clients, including tax preparation, retirement planning, and investment advice.

As a professional service provider, the CPA office is vulnerable to lawsuits. Clients could claim negligence and sue them for not exercising due care. In addition, CPAs keep sensitive client information and risk cyber liability if they suffer a data breach.

What Risks are Not Covered by Business Insurance?

Some risks businesses face are uninsurable. It'll be expensive and difficult, if not impossible, to get coverage for them on the standard or E&S insurance markets. For example, here are some of the primary types of uninsurable risks:

  • Speculative: If you voluntarily take a risk hoping that it’ll benefit you, you won’t be able to insure yourself against the losses you might experience. For example, no carrier will cover your business venture.
  • Gradual: Gradual, inevitable losses are beyond the scope of business insurance. For example, you can’t take out a policy to cover normal wear and tear of commercial property.
  • Catastrophic: Some risks are too expensive to insure because the premiums necessary to justify coverage are unreasonable or the cost of losses is so high as to be inestimable. For example, the risk of global war would be uninsurable.

In addition to uninsurable risks, business insurance policies have limitations that may exclude certain losses from coverage. Make sure you understand these restrictions before committing to a policy.

Develop an Insurance Risk Management Plan

Businesses must develop a plan to manage the various risks they face. Insurance policies should play a pivotal role, as they’re one of the best tools business owners have to protect themselves from personal, property, and liability risks.

However, business owners must also have a plan to protect themselves. It should include steps to reduce the likelihood of related incidents and mitigate losses if accidents occur.

It’s best to consult an insurance agent for assistance with your risk management plan. They can tell you what risks typically affect businesses like yours, which ones are insurable, and how to protect your business beyond coverage.

Reassess Your Business Insurance

You should periodically confirm that you have the best business policy to cover your insurable risks. Contact your insurance agent and tell them to get you a Pathpoint quote today.

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