Chapter 16: Small Business Protection: Risk Management and Insurance (CLASS NOTES)

Non-renewal

A decision by an insurance company not to renew a policy.

Binder

A temporary insurance contract that provides proof of coverage until you receive a permanent policy.

Medical Payments & Personal Injury Protection (PIP)

Both pay limited medical and funeral expenses if you, a family member, or a passenger in your car is injured or killed in a motor vehicle accident. PIP also pays lost-income benefits.

Preferred Provider Organization (PPO)

Hospital, physician, or other provider of health care which an insurer recommends to an insured. A PPO allows insurance companies to negotiate directly with hospitals and physicians for health services at a lower price than would be normally charged.

Subrogation of your Rights

Insurance companies have the right to sue on your behalf (ex: hot water company)

Single Interest Insurance

Insurance coverage for only one of the parties having an insurable interest in that property.

Non-Owners Policy

Insurance coverage that offers liability, uninsured motorist, and medical payments to a named insured who does not own a vehicle.

Risk

Is the very real likelihood that the business may not succeed

Product Liability

Payments for injury or damage that occurs during the use of the business's products

Rental Reimbursement Coverage

Pays a set daily amount for a rental car if your car is being repaired because of damage covered by your auto policy.

Comprehensive Coverage (Physical Damage Other than Collision)

Pays for damage to or loss of your automobile from causes other than accidents. These include hail, vandalism, flood, fire, and theft.

Collision Coverage

Pays for damage to your car without regard to who caused an accident. The company

PNP

Personal injury protection

Replacement

Real cost

Lapse

Termination of a policy due to non-payment of premiums.

Cancellation

Termination of an insurance policy by the company or insured before the renewal date.

Insurer

The insurance company.

Co-insurance

The percent of each health care bill you must pay out of your own pocket. Non-covered charges and deductibles are in addition to this amount.

Policy Period

The period a policy is in force, from the beginning or effective date to the expiration date.

Policy Owner

The person or party who owns an individual insurance policy. This person may be the insured, the beneficiary or another person. The policy owner usually is the one who pays the premium and is the only person who may make changes to a policy.

Underwriter

The person who reviews an application for insurance and decides if the applicant is acceptable and at what premium rate.

Beneficiary

The person, persons or entity designated to receive the death benefits from a life insurance policy or annuity contract.

Underwriting

The process an insurance company uses to decide whether to accept or reject an application for a policy.

Insuring Against Risks

Use of insurance can minimize the damage that such risks can cause

Apartment bathtub overflow

only renter's insurance will protect you

Most commonly identified sources of risk:

-Financial risk -Nonpayment of debts -Changes in technology -Injury and illnesses suffered by employees -Injury from accidents incurred by customers -Natural events (storms, floods, fire, earthquakes) -Theft of business property -Misbehavior by employees

Premium Increases:

-Number of checks -Tickets -Moving

Public Adjuster

A person hired by you to settle the claim with the insurance company to settle the claim on your behalf.

Independent Adjuster

A person who charges a fee to the insurance company to adjust the company´s claim.

Agent

A person who sells insurance policies.

Renewal Policy

A policy issued as a renewal of a policy expiring in the same company or agency; not new business.

Rated Policy

A policy issued at a higher premium to cover a person classified as a greater-than-average risk, usually due to impaired health or a dangerous occupation.

Material Misrepresentation

A significant misstatement in an application form. If a company had access to the correct information at the time of application, the company might not have agreed to accept the application.

Rider

A written agreement attached to the policy expanding or limiting the benefits otherwise payable under the policy. Same as an "endorsement."

Comprehensive

Acts of God

Premium doesn't change with...

Acts of Gods

Subrogation

Assignment of rights of recovery from insured.

Premium

What you pay monthly; based on your coverage

Using insurance to manage risks:

-Insurance provides a benefit by requiring a relatively small fee compared to amount of loss -The more likely an event is to occur, and the greater the potential amount the insurance company must pay, the higher the price you must pay for coverage

Events Related to Customers and Others:

-Risk from customers -Product liability

3 main events involving personnel:

1) Employee Theft 2) Violation of governmental regulations -EEOC and strategies for compliance 3) Key Employees

Three general types of events that cause business risk:

1) Events related to the property of the business 2) Events related to personnel 3) Events related to customers and others

Strategies for Compliance:

1. Stay small enough so they don't fail to obey 2. Ask for forgiveness instead of permission 3. Ask for checks/assistance to make sure they are doing right 4. Fight for what they believe is right

Peril

A cause of property losses. Usually used in the context of "a peril insured against."

Bodily Injury (BI)

Physical injury to a person.

Health Maintenance Organization (HMO)

Prepaid group health insurance plan which entitles members to services of participating physicians, hospitals and clinics. Emphasis is on preventative medicine.

Business Risk

Probability that the future state of the business will be less successful than planned

Policy

The contract issued by the insurance company to the insured.

Replacement Cost

The cost associated with replacing property at current market prices.

Liability Limits

The maximum amount your liability policy will pay. Your policy must pay at least $20,000 per person for injuries and deaths, up to $40,000 for all victims of an accident, plus $15,000 for property damage. You can purchase higher liability limits for additional premium.

Whole vs Term

Whole- still get Term- protection against loan (get nothing at end)

Adjuster

A person who investigates and settles insurance claims.

Surplus Lines

Coverage from out-of-state companies not licensed in Texas but legally eligible to sell insurance on a "surplus lines" basis. Surplus lines companies generally charge more than licensed companies and often offer less coverage.

Violation Governmental Regulations

EEOC (Events related to personnel) -Regulation in the Workplace -1964: 1)race, 2)color, 3)religion, 4)sex or 5)national origin

Staff Adjuster

Employee of the insurance company´s claim department.

EEOC

Equal Employment Opportunity Commission

Gap Insurance

Insurance that pays the difference between the actual cash value of a vehicle and the amount still to be paid on the loan, Some gap policies may also cover the amount of the deductible.

Liability Insurance

Pays for injuries to the other party and damages to the other vehicle resulting from an accident you caused. It also pays if the accident was caused by someone covered by your policy, including a driver operating your car with your permission.

Property of the business:

Property involves specific forms of risk -Inventory can be stolen, machinery can break -Buildings can be damaged or destroyed -Land may become contaminated -Patents may be infringed upon

Exclusion

Provision in an insurance policy that indicates what is denied coverage.

Loss History

Refers to an insured´s history of losses (claims) with other companies, or the company they are currently with. A company will consider "loss history" when underwriting a new policy or considering a renewal of an existing policy. Companies view "loss history" as an indication of an insured´s propensity for a claim in the future.

Liability Clause

Someone walks on property and gets injured; insurance kicks in.

Depreciation

The act of lowering an item´s value due to use or wear and tear.

Loss

The amount an insurance company pays on a claim.

Premium

The amount paid by an insured to an insurance company to obtain or maintain an insurance policy.

Deductible

The amount the insured must pay in a loss before any payment is due from the company.

Reinstatement

The process by which a life insurance company puts back in force a policy which had lapsed because of nonpayment of renewal premiums.

Actual Cash Value (ACV)

The value of your property, based on the current cost to replace it minus depreciation.

Higher the _____; lower the ______.

deductible; premium (and vice versa)

Have to have liability insurance

for Auto

Entrepreneurs are _____.

risk managers

Some business owners are _____, although most small business owners are ____.

risk seeking; risk averse

UIM

uninsured motorists

Risk from customers primarily arises from:

-Injuries suffered while upon business property -Injury or damage that is caused during the use of the business's products

Contract

In most cases, the term "contract" refers to an insurance policy. A policy is considered to be a contract between the insurance company and the policyholder.

Uninsured/Underinsured Motorist (UM/UIM) Coverage

Pays for your injuries and property damage caused by a hit-and-run driver or a motorist without liability insurance. It will also pay when your medical and car repair bills are higher than the other driver´s liability coverage.

Property Damage (PD)

Physical damage to property.Providers - Usually references doctors or those who are providing a medical service.

Managing risk from violations of tax regulations:

Limit your exposure -Keep complete, accurate accounting records: >Control access to accounting system >File all source documents -Establish a relationship with both an accountant and lawyer who are expert in tax issues -Make paying your taxes your first financial priority

Redlining

Refusal by an insurance company to underwrite or to continue to underwrite questionable risks in a given geographical area.

Collision

Replace damage from wreck

Liability

Responsibility to another for one´s negligence.

Whole Life Insurance

Whole life insurance policies are one type of cash value insurance. Whole life policies offer protection through a lifetime - that is, for a person's "whole life." From the day you buy the policy, you pay a scheduled premium,. The scheduled premium may be level or may increase after a fixed time period, but it will not change from the amount(s) shown in the policy schedule. It is important that you look at the policy schedule to be sure you understand what your premium payments will be and that you can afford them over time. This premium is based on your age at the time of purchase. Initially, it will be higher than the premium paid for a term policy, but you are likely to end up paying less in premiums when you are older, if you keep the policy for a long time. Part of each premium payment will go to cash value growth, part for the death benefit and part for expenses (such as commissions and administrative costs). There is no need to renew whole life policies. As long as you pay your premium when due, your coverage will continue in force throughout your life.

Actual Cost

depreciation considered for # of years