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How to Determine if a Business Risk is Insurable or Not

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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.

Coverage 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.

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