What is the purpose of business insurance? Definitions explained

What is the purpose of business insurance? Definitions explained

Insurance Expert, Simon Taylor

What is the purpose of business insurance?

Business insurance allows companies to better manage the financial consequences of unforeseen events

Below we provide an insight into how business insurance works by looking at some of the key principles that underpin the contractual arrangements between policyholders and insurers.

No company wants to buy insurance because you are planning for something that you hope will never happen. However, it is good risk management to protect your balance sheet from unexpected financial shocks.

What is business insurance?

Business insurance is essentially a contractual agreement between the policyholder and the insurer, which in the event of certain events occurring will provide financial compensation

Financial protection from business insurance arises with a contractual agreement that in the event of a claim for compensation, loss or damage, the insurer will seek to cover the cost and indemnify the policyholder.

Businesses will use insurance policies to manage the risk of severe financial events, effectively hedging against the event occurring and paying an insurance premium to the insurer to accept the risk.

Business insurance definitions

Business insurance definitions, conditions, exclusions and insuring clauses will vary from product to product, however the structure of insurance policies remains consistent

Business insurance definitions are specific terms used in the policy. The word will usually be highlighted to ensure you understand that a specific definition is used and not the common understanding of the word in the English language.

Conditions under business insurance policies will seek to qualify information or put limitations on the insurer’s requirement to make payment. If the conditions are not met, the insurer may to limit the amount payable or deny the claim. 

Business insurance exclusions will seek to remove cover. Typically, policy wordings are designed to provided broad protection under the affirmative insuring clauses, then narrowly define the circumstances the insurer will not make payment.

What is business liability insurance?

Liability insurance encompasses a number of different covers that can offer legal costs in defending allegations, and protects against damages resulting from any judgment, award or settlement.

The most commonly purchased business liability covers include employers liability, public liability and professional liability insurance, each offering financial protection from demands for compensation whereby you may be legally liable.

Liability insurance definitions can vary, therefore it is worth considering the terms and features to understand what cover best meets your demands and needs.

What is business property insurance?

Business property insurance encompasses a number of different covers that can offer cover for the loss, damage or destruction of insured property from a range of different perils.

Business property insurance covers are commonly purchased under office insurance policies for professionals, contractors all risk insurance for construction firms, or commercial combined insurance for a range of business activities.

Property insurance definitions can vary, it is worth considering whether the cover is offered on an 'all risks' basis or named insured perils which provides a more restrictive cover.

What are the underlying principals of business insurance?

Liability insurance for business can be confusing, below we've identifed some key principles that underpin business insurance:

What is indemnification?

Indemnification is one of the core principles of business insurance. The insured should not profit from a loss or damage but should be returned to the same financial position before the loss or damage occurred.

The insured cannot profiteer and recover more than his or her actual loss. There are however exceptions to this rule, such as personal accident and life insurance policies where the amount is paid on occurrence of accident or death.

What are long-tail liabilities?

Civil actions can take years for a claim to be made, the statute of limitations for a tort (civil wrongdoing) is six years. Long-tail business liability means there is potential for a claim to be made against you for an extended period after the event occurred.

In addition, it can also take an extended period to settle the claim. This potential for a long settlement period means liability insurance claims are often called long-tail liabilities.

What are limits of liability?

The limit of liability is the maximum amount for which an insurer may make payment under the policy. It is worth acknowledging that limits of liability can work on a different basis.

For example, some business liability insurance policies work on an 'aggregate' basis (the total amount payable), or on a 'any once claim' basis (the total amount payable for claims arising from any single event).

What are defence costs?

It is common for defence costs to represent a higher amount than the settlement or damages awarded under a business liability insurance policy. Consideration should therefore be given to the total limit of liability your business requires.

For example, it is recognised that defence costs for products such as directors and officers insurance can typically amount to over 60% of the total cost of the claim.

What is the duty to defend?

A duty to defend provision provides the right to select legal counsel and control the defence of a claim. In some business liability insurance policies (i.e. EPL Insurance) the insurers will want to protect their interests in managing the cost of your claim. They will have a panel of law firms ready to respond to defend claims made against you.

Whereas, with some insurance policies (i.e. D&O insurance) it is the duty of each insured person to select legal counsel and control the defence of a claim. The insurer will reserve the right to be consulted prior to any spend against the policy.

Originally posted by Simon Taylor, insurance expert, Get Indemnity™

This guide is for information purposes and based on sources we believe are reliable, the general risk management and insurance information is not intended to be taken as advice with respect to any individual circumstance and cannot be relied upon as such.