What is commercial insurance and why is it necessary?
By Leana Schwartz, Independent Commercial Insurance Agent
In its most basic sense, commercial insurance—also known as business insurance—protects various types of businesses against potential losses due to unforeseen circumstances and situations such as:
- Property damage
- Property theft
- Injured employees and/or customers
- Business interruption
- Third-party lawsuits
- Client lawsuits
The importance of commercial insurance
Businesses require the investment of considerable time, energy, and money to be successful. Every business owner wants to protect their investment from potential loss. Commercial insurance is the best way to achieve this goal.
Business owners can purchase insurance which provides compensation if and when a financial or other type of loss occurs. Operating without adequate insurance increases the likelihood that the business and/or its principals will incur significant out-of-pocket costs in the event of a loss, or when facing a lawsuit.
Types of commercial insurance
There are several types of commercial insurance available. Selecting the appropriate coverage depends upon the nature of the business and its unique needs. Common types of commercial insurance include:
- Workers’ compensation
- General liability
- Errors and omissions (E&O) or professional liability
- Employment practice liability
- Cyber liability
How commercial insurance works
Following a loss, the business owner files a claim with their insurance provider. The provider, in turn, investigates the claim’s legitimacy, assesses any damage that could be a covered cause of loss under the policy, and then provides financial compensation to the insured business.
Liability insurance claims
For claims under a liability policy — whether general liability, E&O, professional liability, or employment practices liability — the process is a bit different. A liability claim arises when a business is sued — whether by a customer, client, employee, or another party. In these situations, the plaintiff (the person or business which files the lawsuit) believes that the business they are suing is liable for some type of financial damage, and seeks compensation for said loss.
If a commercial policy covers the particular type of claim, the insurance company typically provides an attorney for its insured client to take control of the case, participate in any legal hearings or trials, and/or settle the matter. Any costs for legal representation are paid for by the insurance company, in accordance with the deductible, limits, and other terms of the insurance policy.
Commercial insurance terminology
- Deductible or retention: the amount the insured business must pay toward a particular claim before the insurance provider will step in with funds.
- Coverage: the types of losses the policy can and will pay for.
- Exclusion: specific circumstances in which the policy will not cover a loss.
- Policy limit: the maximum amount of compensation an insurance policy will pay out.
- Premium: the amount paid per period – monthly, quarterly, or annually – to purchase insurance coverage.
As with any contract, it is critical to read the fine print of an insurance policy and understand all of the policy’s details. Professional insurance agents will discuss any questions or concerns clients may have about their insurance coverage.
Commercial insurance requirements
Generally, the only legally mandatory type of commercial insurance is workers’ compensation insurance, which applies only to businesses which have non-owner employees. But in many cases, businesses are required to carry additional types of insurance, especially if the premises where the business operates are being leased. Commercial property lease agreements commonly specify that tenants must carry general liability insurance.
Commercial insurance costs
Insurance premiums are based on estimates of risk. These calculations are performed by actuarials, who are business professionals who specialize in the science of analyzing risk and uncertainty using statistics and probability models. The factors which go into these calculations include, but are not limited to:
- Type and location of the business.
- Likelihood of loss.
- Potential cost of a claim.
The greater the relative risk of loss and/or the higher the potential cost of claims, the higher the premiums assessed. Conversely, businesses that entail relatively low risks and smaller potential claims will enjoy lower insurance policy premiums.
Managing commercial insurance costs
Like any business expense, insurance costs must be monitored and managed. A professional commercial insurance agent can often provide advice and expertise to help business owners manage their insurance costs. Businesses may be able to control or reduce insurance coverage costs by taking any or all of the following steps:
- Moving the business location.
- Reducing inventory levels.
- Improving safety policies and procedures.
Shopping around for competitive quotes can also be an effective way to control insurance costs. Working with an independent insurance agency makes this easy, because independent agents have access to multiple insurance providers to ensure their clients get the best coverage and rates.