Understanding standard insurance terms is a crucial aspect of running a business- It protects against unforeseen financial losses and ensures that a company can continue to operate despite accidents, lawsuits, or natural disasters.
However, understanding the complex jargon of insurance policies can be overwhelming. Whether you’re purchasing business insurance for the first time or reviewing your existing coverage, knowing key terms can help you make informed decisions.
Below are five essential insurance terms that every business owner should understand: Premiums, Claims, Deductibles, Loss Runs, Limits and exclusions-
1. What Are Insurance Premiums?
A premium is the amount a business owner pays an insurance company to maintain coverage. This payment can be made monthly, quarterly, or annually, depending on the policy terms. Premiums are determined based on several factors, including the type of business, the level of coverage needed, and the business’s risk exposure.
Factors That Affect Insurance Premiums:
- Industry Type: High-risk industries, such as construction or manufacturing, often have higher premiums due to increased liability and safety concerns.
- Business Size: Larger businesses with more employees and assets may have higher premiums since there is more at stake.
- Claims History: Businesses with a history of frequent claims may be considered riskier and therefore charged higher premiums.
- Coverage Limits and Deductibles: Choosing higher coverage limits and lower deductibles will increase premium costs.
- Location: Businesses in areas prone to natural disasters or high crime rates may have higher premiums.
2. What Are Insurance Claims?
An insurance claim is a formal request made by a business to its insurance provider to receive compensation for a covered loss. When an insured event occurs, such as property damage, employee injury, or liability lawsuit, the business must submit a claim to receive financial reimbursement or support.
How to File an Insurance Claim:
- Report the Incident: Notify your insurance provider as soon as the loss occurs.
- Provide Documentation: Submit necessary evidence, such as photos, police reports, or receipts, to support the claim.
- Insurance Adjuster Review: An insurance adjuster assesses the damage and determines the claim’s validity.
- Claim Settlement: The insurer either approves or denies the claim. If approved, the company pays the covered amount after deducting any applicable deductible.
Tips for Handling Claims Efficiently:
- Maintain detailed records of incidents, including dates, times, and any communications.
- Report claims promptly to avoid delays.
- Understand the policy coverage and exclusions to set realistic expectations.
- Work closely with the insurance adjuster to ensure all necessary documents are provided.
3. What Are Insurance Deductibles?
A deductible is the amount a business must pay out-of-pocket before the insurance company starts covering a claim. Deductibles exist to share risk between the policyholder and the insurer and prevent excessive small claims.
How Insurance Deductibles Work:
- If a business has a $1,000 deductible and experiences a $5,000 loss, the insurance company will pay $4,000 after the business covers the first $1,000.
- Policies with higher deductibles typically have lower premiums since the business assumes more of the financial risk.
- Deductibles can be applied on a per-claim basis (each claim requires a deductible payment) or an annual aggregate basis (once the deductible is met for the year, further claims may not require additional deductible payments).
Choosing the Right Deductible:
- Low Insurance Deductibles: Suitable for businesses that prefer lower out-of-pocket expenses during a claim but are willing to pay higher premiums.
- High Insurance Deductibles: A good option for businesses that can absorb minor losses and want to lower their premium costs.
4. What Are Insurance Loss Runs?
A loss run report is a detailed history of an insured business’s past claims. Insurance companies use this report to assess a business’s risk level before issuing or renewing a policy. Essentially, it serves as a “credit report” for insurance claims.
What’s Included in a Loss Run Report?
- Claim Dates: A record of when claims were filed and processed.
- Claim Amounts: The total cost of each claim, including paid and reserved amounts.
- Claim Status: Whether the claim is open, closed, or denied.
- Type of Loss: The nature of the claim (e.g., property damage, liability, worker’s compensation).
- Frequency of Claims: A history of how often claims have been filed.
Why Loss Runs Matter:
- Lower Premiums: Businesses with fewer claims may qualify for lower insurance premiums.
- Improved Risk Management: Identifying common claim types helps businesses address risks proactively.
- Better Negotiation Power: A favorable loss run report allows businesses to negotiate better insurance rates.
How to Request a Loss Run Report:
- Contact your insurance provider and request the report in writing.
- Most insurers provide reports within 5–10 business days.
- Review the report for accuracy before submitting it to a new insurer if switching providers.
5. How Do Insurance Limits & Exclusions Work?
A coverage limit is the maximum amount an insurer will pay for a covered loss. Each policy has predefined limits based on coverage type, such as liability, property damage, or workers’ compensation.
Types of Insurance Coverage Limits:
- Per-Occurrence Limit: The maximum payout for a single claim.
- Aggregate Limit: The total amount an insurer will pay for multiple claims during a policy period.
- Sub-Limits: Specific caps on certain types of claims, such as theft or flood damage.
Insurance Coverage Exclusions:
Exclusions are situations or types of damage that an insurance policy does not cover. Common exclusions include:
- Intentional Acts: Damage or losses caused intentionally by the policyholder.
- Negligence: Some policies exclude claims resulting from improper business practices.
- Natural Disasters: Many standard policies do not cover floods or earthquakes unless additional coverage is purchased.
- Specific Business Risks: Industry-specific exclusions based on the nature of the business.
Understanding coverage limits and exclusions helps business owners avoid surprises when filing claims and ensures they have adequate protection in place.
Getting The Most Out of Your Commercial Insurance
Being knowledgeable about commercial insurance, managing premiums wisely, filing claims correctly, choosing appropriate deductibles, and keeping track of loss run reports, business owners can maintain comprehensive coverage while keeping commercial insurance costs in check. Insurance may seem complex, but having a firm grasp of these fundamental concepts will give you greater control over your business’s financial security.
Need to consult a professional? If you’re unsure about any aspect of your insurance policy, consulting an independent insurance professional can help ensure you have the right protection for your business.
Contact Lee Insurance Agency today at 281-812-8400 to discuss your commercial insurance needs.
