What Is an Insurable Risk?
Business insurance is designed to protect your IT company against risk, or the likelihood of a loss. But it’s important to understand that even the most comprehensive insurance policies don’t cover every type of risk, and don’t offer unlimited compensation in the event of a claim.
When you buy commercial risk insurance, you pay premiums to the insurance carrier, which in turn agrees to pay a claim in the event you should suffer a covered loss. By pooling premiums from many policyholders at once, insurers are able to pay for the claims of the few who do run into problems, while providing protection to everyone else in the pool in case they need it.
Coverages provided on business insurance policies differ from insurance carrier to insurance carrier. So, it is always wise to seek the broadest coverage you can afford. However, because some losses are impossible to value or are too costly, too probable, or too susceptible to manipulation, insurance companies don’t cover them at all. These are known as “uninsurable risks.” For example, most professional liability policies won't cover you if a client sues you for not paying a bill or for stealing a customer or employee. And, of course, any allegation related to a criminal act or intentional wrongdoing on your part is generally uninsurable. For example, if you intentionally damage your own property or injure someone, your property insurance coverage won't apply.
Consequential losses are also generally uninsurable. For example, if you're sued for a mistake you made while providing services to a client, your policy may pay the claim for the error. However, if as a consequence of your mistake, the client stops doing business with you and you go out of business, those losses aren't covered.
Carriers may also choose not to insure risks that are considered inevitable, such as providing property insurance to a business when a wildfire is burning just miles away. They also don't cover gradual damage to property related to maintenance or wear and tear, such as a old, leaky roof.
For a business risk to be insurable, it typically must meet a few criteria:
- The risk is potentially costly enough that a business is willing to pay a premium to protect against it.
- The risk can’t be so catastrophic that the insurer would never be able to pay for the loss (i.e. act of war).
- The risk is well-defined and has a clear, measurable value that can’t be influenced by the policyholder.
- The risk is random, not within the
policyholder’s control; and the policyholder cannot cause or influence the loss.
- There must be a sufficient number of insureds subject to the same risk, so that all policyholders’ combined premiums can share in the cost of any losses – but it must be unlikely that all policyholders will suffer a loss at the same time.
Limitations of Coverage
Ultimately, whether or not a specific risk will be insured is defined by the policy. Some types of high-risk occurrences may be covered, but only up to pre-determined monetary limits. Even in the same policy, different types of covered losses may have different limits or exclusions. There may also be limits on the total amount of covered losses that an insurer will pay.
Depending on the type of coverage, there may also be deductibles that apply. For example, if your property insurance policy has a $10,000 deductible, the insurer won’t pay any claim less than $10,000, and will pay only for losses beyond the first $10,000. In other words, if an applicable loss totals $30,000, the insurer will pay $20,000, and you will be responsible for the $10,000 deductible.
In many cases, the policyholder may choose to pay a higher premium for insurance with higher payout limits and/or lower deductibles, or to pay less in premium for a policy that provides lower benefits in the event of a claim.
Know Your Policy
Be sure you understand your specific policy benefits, as well as what isn’t covered. With the exception of property coverage, the insurance company will generally not write a check to reimburse a customer (an insured) for its losses. Additionally, liability insurance policies do not pay for an insured's costs when the insured sues another party. Liability coverage pays only for the defense and settlement of claims filed against the insured.
Insurance is just one part of a comprehensive risk management strategy, so you may need to employ other tactics to mitigate risk exposure. For example, for some risks that can’t be covered by insurance, many small businesses create clauses in their client contracts that protect their company against specific losses. Such clauses might, for example, address protection of confidential business information or prevent the client from hiring away your employees or re-distributing any software you license.
If you’re concerned about securing coverage for a specific kind of risk, contact TechInsurance for an IT risk assessment to determine your risk exposure, to learn what coverage options may be available, and to receive a no-obligation quote to learn about coverage rates for the protection you need.