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Insurance of Business Risk

ersonal financial planning for the business owner requires that the risks affecting his business
should also be covered. No matter how diligent an entrepreneur is, a single crisis can annihilate all
profits and can even ruin the business. Protecting the business with insurance is the key to cover all
financial risks. It ensures that the money invested in the business does not disappear whenever a
catastrophe strikes.
It is the job of the financial planner to study the nature of the business run by his client and spot the
potential exposure to risk. Whereever the financial planner feels the need, he/she should not hesitate to
consult an expert in this area.

Purpose of Business Insurance

Business insurance can be taken for three main purposes:

To protect the business from physical destruction

To keep the business afloat if a key employee dies or becomes disabled

To protect the business assets if someone threatens or sues the business

Let us look at these in more detail.

Building and equipment insurance
This protects the business owner if the facility or equipment is damaged or destroyed.
Valuable papers insurance
This protects the owner if any valuable documentation or business records are lost or destroyed.
Crime insurance
This protects the business in case of theft.
Business interruption insurance
This protects the business by replacing some or all of the operating cash flow if the business is unable
to maintain its normal operations for a period of time due to a covered event.
Benefits of Business Interruption Insurance

Its an effective tool against a financial crisis.

It helps to insure against the monetary losses which an entrepreneur may encounter while running
his business.

It compensates the owner for the lost money if the company has to evacuate the premises due to the
occurrence of a disaster-related damage such as fire, which is covered under the property insurance
policy.

It covers the profits which the business would have earned if the disaster had not occurred.

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This insurance also covers operating expenses, such as the electricity, which continues even after
the disaster has victimized the business.

Example
A company Morality Investments was in the congested central town of Jallandhar. The civic authorities
were to begin road widening process, after the municipal authorities had agreed to the project widening
exercise. The orders were passed and the process was to begin. The company would have to be closed
and business would be interrupted, when it happened. Luckily, the owner had taken the business interruption
insurance, which helped take the cash flow situation.
Extra expenses insurance
This protects the business by reimbursing extra-ordinary expenses incurred to maintain normal operations
after the occurrence of a covered event.
For small business enterprises, package policies generally provide needed coverages. These policies
usually combine property and liability coverages for the standard risks faced by businesses of the type
being insured.
Key Person Insurance
Key Person Insurance is specifically designed to protect a business in the event of loss of an important
person who makes a remarkable contribution towards the progress of the business.
Who is a key person?
A key person or a key man is the owner, director or any ordinary employee, with special expertise,
without whom the company or the business might suffer heavy losses. Death or permanent disability of
the key person could result in:

Reduction in profit

Loss of significant clientele

Loss of time, money and efforts in recruiting a replacement

Loss of business ideas, projects and ventures

How much key person insurance is enough?

There is fixed formula that determines the value of a key employee. Expected profits, replacement costs
and a compensation-multiple formula are the usual techniques of determining a loss. The following
factors are also taken into consideration to determine the amount of coverage:

Projects that would be lost with the loss of the key employee

Sales generated by the employee

Age of the person

Physical condition of the person

Cost of replacing the individual

Important:
Partnership and proprietorships tend to be much more dependent on one or two key employees as
compared to companies. Therefore, key employee insurance is much more relevant for them.

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Chapter Review

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