The possibility of suffering harm or loss.
The possibility of losses associated with the assets and the earnings potential of a firm.
The uncertainty (gain or loss) associated with an investment decision.
- The uncertainty associated with a situation where only losee or no loss can occur- there is no potential for gain (only downside).
- Only form of risk that is insurable.
- Real property
- Personal property
- Replacement value of property
- Actual cash value (ACV)
- Direct loss
- Indirect loss
Land and anything physically attached to the land, such as buildings.
Machinery, equipment, furniture, fixtures, stock, and vehicles.
The cost to replace or replicate property at today's prices.
Replacement Value of Property
An insurance term that refers to the depreciated value of the property.
Actual Cash Value (ACV)
A cause of loss, either through natural events or through the acts of people.
A loss in which physical damage to property reduces its value to the property owner.
A loss arising from inability to carry on normal operations due to a direct loss to property.
- Workers compensation legislation
- Contractual liability
- Indemnification clause
Liability Risks: Statutory Liability
Laws that obligate the employer to pay the employees for an employment related injury or illness, regardless of fault.
Worker's Compensation Legislation
Performance or financial obligations (risks) that firms assume when entering into contracts with other parties.
A contractual clause that requires one party to assume the financial consequences of another party's legal liabilities.
- Establishing Negligence
- Reasonable (prudent person) standard
- Compensatory damages
Liability Risks: Contractual Liability
Wrongful acts or omissions for which an injured can take legal action against the wrongdoer for monetary damages.
- A legal duty between parties to act (or not to act) to cause injury (damage)
- A failure to provide the appropriate standard of care
- The presence of actual injury or damages
- Action that was proximate cause of injury or damage.
The typical standard of care, based on what a reasonable or prudent person would have done under similar circumstances.
Reasonable (Prudent Person) Standard
Economic or noneconomic damages intended to make the claimant whole, by indemnifying the claimant for any injuries or damage arising from the negligent action.
- Economic damages
- Noneconomic damages
- Punitive damages
Torts: Types of Damages
Compensatory damages related to an economic loss, such as medical expense, loss of income, or the cost of property replacement/restoration.
- Easier to quantify than noneconomic damages
Compensatory damages for losses such as pain and suffering, mental anguish, and loss of consortium.
Damages intended to punish wrongdoers for gross negligence or a callous disregard for the interests of others and to have a deterrent effect.
- Manufacturing defect
- Design defect
- Marketing defect
A defect resulting from a problem that occurs during the manufacturing process causing the product to subsequently not be made according to specifications.
A defect resulting from a dangerous design, even though the product was made according to specifications.
A defect resulting from failure to convey to the user that hazards are associated with a product or to provide adequate instructions on safe product use.
Risks that directly affect individual employees, but may have an indirect impact on a business as well.
- Ways of coping with risk that are designed to preserve assets and the earning power of a firm.
- Involves finding the best way possible to reduce the cost fo dealing with risk.
- Insurance is only one of several approaches to minimizing the pure risks a firm is sure to encounter.
- Small businesses pay insufficient attention to analyzing potential risk.
- Large firms can assign responsibilities for risk management to a specialized staff manager.
- Risk management is not something that requires immediate attention- until something happens.
Risk Management Differences From Large Firms:
Loss prevention and loss avoidance =
Risk Control and Loss Reduction
Making funds available to cover losses that cannot be managed by risk avoidance.
- Risk transfer
- Risk retention
Buying insurance or making other agreements with others to transfer risk.
Choosing- whether consciously or unconsciously, voluntarily or involuntarily- to manage risk.
Designating part of the firm's earnings as a hedge against possible future risks.
- Property insurance
- Business interruption insurance
- Commercial General Liability (CGL) insurance
- Automobile insurance
- Workers' compensation insurance
- Crime insurance
- Business owner's policy (BOP)
- Package policy
Property and Casualty Insurance
- Named-peril approach
- All-risk approach
- Coinsurance provision
Identifies the specific perils covered.
Defines the perils covered by stating that all direct damages to property are covered except those caused by perils specifically excluded.
Property must be insured for at least 80% of its value or ca penalty will be applied to any covered loss.
Reimburses for loss of (anticipated) income plus continuing expenses due to direct loss impacting business revenues.
Business Interruption Insurance
Covers bodily injury and property damage for which the business is liable.
Commercial General Liability (CGL) Coverage
Protects against liabilty and physical damage to a vehicle resulting from insured perils such as collision, theft, vandalism, hail, and flood.
Provides benefits to employees for medical expenses, loss of wages, and rehabilitation expenses, as well as death benefits for employee's families.
Worker's Compensation Insurance
Coverage against employee dishonesty.
A business version of a homeowner's policy, designed to meet the real and personal property and liability insurance needs of small business owners.
Business Owner's Policy (BOP)
- A lower premium than would otherwise be required to purchase all coverages separately
- Automatic inclusion fo business interruption insurance.
- Automatic replacement value protection, as opposed to actual cash value protection.
Advantages of BOP
A policy for small businesses that do not qualify for a BOP that combines property insurance and commercial general liability insurance.
- Lower premium than would otherwise be required to purchase all coverages seprately.
- Ease of adding other coverages more economically.
- Inclusion of business interruption insurance
- Inclusion of crime insurance
Advantages of Package Policy
- Health Insurance
- Health Maintenance Organization (HMO)
- Preferred Provider Organization (PPO)
- Key-Person Insurance
- Disability Insurance
Life and Health Insurance
Coverage for medical care at hospitals, doctors' offices, and rehabilitation facilities, that usually includes outpatient services and prescription drugs.
A managed-care network that provides health insurance that is generally less expensive than that of a PPO but limits employees' choices of medical care providers more than a PPO does.
Health Maintenance Organization (HMO)
A managed-care network that provides health insurance that is generally more expensive than an HMO but offers a broader choice of medical providers.
Preferred Provider Organization (PPO)
Provides benefits upon the death of a firm's key personnel.
Provides benefits upon the disability of a firm's partner of other key employee.
- Disability buyout insurance
- Key-person disability insurance