Each business has its exposure to risk. The type and severity of risk greatly vary between the business classes. For a long haul trucking company, an automobile liability risk is one of the trucking company’s major exposures. Yet, a small mercantile shop may not have any auto liability risk exposure. As a result, to determine a business’ minimum insurance needs an accurate risk assessment survey should be performed.
Prior to starting the risk assessment, the business owner should establish a realistic budget for all of the insurance expenses. Remember: Nobody should work only to pay for insurance and taxes. The key is to set a realistic budget, then stay within the budget. Once the insurance budget is established, any required insurance must be removed from the budget. For example:
ABC, LLC’s Insurance Budget = $40,000 annually
Mortgage Holder on building requires hazard insurance – 5,500
Lienholder on autos requires physical damage on autos – 5,500
State of Texas requires minimum auto liability insurance – 2,500
A client has the following insurance requirements:
$1,000,000 General Liability Insurance – 5,000
$1,000,000 Business Auto Liability Insurance – 2,500
Workers’ Compensation – 3,500
$2,000,000 Excess Liability Insurance – 2,500
Lienholder requires insurance on an equipment loan – 1,500
Balance for remaining Insurance $11,500
Is this is the minimum insurance that the business needs? Maybe, but it probably is not. It is the minimum required, but the business might have some major gaps that should be filled. The above example has $11,500 to apply to the completed risk assessment.
The ways to deal with a risk are:
- Avoidance: Eliminate the risk by avoiding the risk. Best method.
- Assume/Retain: Great for low severity and low frequency risk.
- Transfer: Contractually transfer the risk to another party (insurance, lease agreement, etc.). Great for higher severity and low frequency.
Typically the assessment will be a long list of exposures. Each exposure should be classified as avoid, assume, or transfer. Insurance might be a good solution for the “transfer” exposures. After a premium for each “transfer” item is provided, the owner should choose how to cover as many of the risks without violating the budget.
WARNING: If a client requires a business to have a certain minimum limit of insurance (for example: $1,000,000 of commercial general liability insurance), that does not mean the liability limits are adequate for the business’ exposure. The business may need higher limits of liability. Liability limits should be chosen based on maximum exposure.
Generally, commercial insurance agents have access to industry specific assessment surveys. Unfortunately, the business owner must be involved in the survey process. It is a pain to complete the process, yet the process may save your business after a major loss.