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A policy pays a loss less the deductible, up to its limit, and not what it excludes; the owner carries the rest and the premium, so compare policies on total cost and check the limit and exclusions against the business's biggest risks.
Paper packet. Every task here also exists on screen, where it is checked automatically; answers written on paper are not assessed by Nydus. When you are back at a device, enter your answers there.
You will work out what a policy pays and what the owner carries for losses of different sizes, compare two policies on total cost, work out an owner's year after a loss above the limit, and test a bakery's policy.
Transferring a risk is one of the four responses, and insurance is the usual way to do it. It suits the rare, large risks a small business could not survive on its own. But a policy transfers only part of a risk, and the part it leaves is set out in the policy's terms. This lesson reads those terms with the arithmetic of the last lesson: a loss, a share, and what is left.
| Term | What it means |
|---|---|
| Premium | What the policy costs each year, whether or not there is a claim. |
| Deductible | The part of each claim the owner pays before the policy pays anything. |
| Limit | The most the policy pays for any one event or in a year. |
| Exclusion | Something the policy does not cover. |
| Under-insured | Having a limit below what a realistic loss could cost. |
| Condition | Something the owner must do for a claim to be paid, such as reporting it within 30 days. |
Northside Repairs' stock policy has a 500-dollar deductible and a 10,000-dollar limit. Three losses:
$$\text{policy pays} = \min(\text{loss} - \text{deductible}, \ \text{limit})$$
The owner always pays the premium, pays the deductible on every claim, and carries everything above the limit. The large loss — the one insurance is mostly for — is where the limit matters most. The policies in this lesson are invented for practice; real terms come from the policy document and the insurer.
Another way: table
Northside Repairs' policy against three losses.
| Loss | Policy pays | Owner carries |
|---|---|---|
| 300 | 0 | 300 |
| 2,400 | 1,900 | 500 |
| 16,000 | 10,000 | 6,000 |
Another way: steps
Start from the loss. Estimate what the event would cost: the damaged stock or equipment, the repairs, and — if the policy covers it — the trade lost while the business is closed.
Take off the deductible. If the loss is smaller than the deductible, the policy pays nothing, and there is no point claiming. If it is larger, the owner pays the deductible and the policy considers the rest.
Cap at the limit. The policy pays the loss less the deductible, or the limit, whichever is smaller.
Find the owner's share. Whatever the policy does not pay, the owner carries, on top of the premium already paid.
Check each figure by sense. What the policy pays and what the owner carries must add up to the loss. The policy can never pay more than the loss, or more than its limit; the owner's share is at least the deductible on any claim that is paid.
A higher deductible usually means a lower premium. That suits a business that can easily pay small losses itself and wants cover for the big ones. Compare two policies on the owner's total cost — premium plus the deductible on the claims the owner expects — rather than on premium alone. A policy with a cheap premium and a large deductible is the better buy in a year with no claims, and the worse one in a year with several.
The number of claims the business expects comes from its risk map. A business that rarely claims should usually choose the higher deductible and keep the premium saving as a cash cushion; one that claims often should ask why, because frequent small claims usually point to a risk that should be reduced rather than insured.
Then read the exclusions, because a policy that excludes the business's biggest risk is not cover for it. A kitchen policy that excludes refrigeration breakdown leaves the fridge risk exactly where it was. A shop policy that excludes flood leaves a shop by a river uninsured for the one event most likely to close it; in the United States, flood cover is usually bought separately. A studio policy that excludes damage caused by its own kiln leaves the likeliest fire uncovered.
Read the conditions too. A policy may require locks of a certain standard, an alarm that is switched on, or claims reported within a set number of days. A claim can be refused because a condition was not met, even when the loss itself is covered.
Check the limit against the worst realistic loss, and raise it as the business grows: a limit set for a single market stall will not cover a shop's stock and fittings. Many businesses become under-insured without noticing, because their stock, equipment and trade grow a little every year while the policy renews at the same limit. A yearly review, at renewal, of what it would cost to replace everything and to survive the months of rebuilding, keeps the limit honest.
Which kinds of insurance a business must carry by law depends on where it operates and whether it employs people. In most US states, a business with employees must carry workers' compensation insurance, and a business vehicle needs commercial auto cover. Owners check their state's rules and ask the insurer or an adviser.
Small businesses in the United States usually meet a handful of policy types, each covering a different part of the risk map.
General liability covers claims from other people: a customer who slips on a wet floor, a delivery that damages a client's property, a product that injures someone. Its limit is usually set per claim and per year, and many landlords and larger customers ask to see proof of it before signing.
Commercial property covers the business's own building, fittings, equipment and stock against fire, theft, storm and similar events, subject to its exclusions. Business interruption, often sold with it, pays for lost profit and continuing costs such as rent and wages while the business is closed by a covered event. For many small businesses the lost trade during a closure is larger than the physical damage, so interruption cover is often the part that decides whether the business survives.
A business owner's policy bundles general liability and property into one package for smaller businesses, usually at a lower premium than buying each separately.
Workers' compensation covers employees injured at work, and most states require it once a business has employees. Commercial auto covers vehicles used for the business, because a personal auto policy often excludes business use. Professional liability covers claims that advice or a service caused a client a loss, and matters for consultants, designers, tutors and anyone paid for expertise.
Each has its own premium, deductible, limit and exclusions, so the same reading applies to each: what it pays, what it leaves, and whether the gaps fall on the business's biggest risks.
Insurance is worth what it pays on the day of a loss, and a claim goes more smoothly when the business has prepared for it. Keep an up-to-date list of equipment and stock with their values, backed up away from the premises, with receipts or photos. After a loss, report it promptly as the policy's conditions require, photograph the damage before clearing it up, and keep receipts for emergency repairs and temporary arrangements.
An insurer pays for what it can see evidence of. A studio owner who can show photos of the shelves last month and invoices for the wheels and kiln will be paid faster and more fully than one who has to reconstruct a list from memory while cleaning up after a fire. The records the next lesson describes are part of what makes insurance work.
A family restaurant in a Midwestern town had bought its property and business-interruption policy when it opened, with a limit of 150,000 dollars, and renewed it every year for twelve years without changing the terms. Over those years it had added a patio, a second walk-in cooler, new ovens and a much larger dining room.
A kitchen fire closed it for four months. The damage to the building's fittings and equipment came to about 190,000 dollars, and the lost trade during the closure to about 80,000: 270,000 in all. The policy paid its limit of 150,000; the 2,500-dollar deductible made no difference, because the loss was far above the limit. The owners carried 120,000 themselves, from savings and a loan.
Had they reviewed the limit at renewal, raising it to 300,000 would have added perhaps 1,200 dollars a year to the premium: about 14,000 over twelve years, against a 120,000 shortfall. The restaurant reopened, but its owners now review the policy every year with their agent, walking through what it would cost to replace everything and to survive a closure of six months.
Deductibles keep premiums down by leaving small losses with the owner, which saves the insurer the cost of handling many small claims. They also give the owner a reason to prevent losses, since the owner pays the first part of every one.
Insured means covered for the whole loss. The deductible and anything above the limit stay with the owner.
The cheapest premium is the best policy. Compare premium plus expected deductibles.
All risks are covered. Read the exclusions.
A limit set once is enough. Review it as the business grows.
Every loss is worth claiming. A loss below the deductible pays nothing, and frequent small claims can raise the premium.
Business interruption is a luxury. For many small businesses the trade lost during a closure costs more than the damage itself. Rent, loan payments and key wages go on while no money comes in, and interruption cover is what pays them. A business that insures its equipment but not its income can rebuild its kitchen and still close for good, because it ran out of cash during the months it took.
The agent will make sure it is right. An agent can only insure what the owner tells them about. Tell them when the business adds equipment, staff, vehicles or a new site.
Read the terms.
$\text{deductible } 200; \text{ limit } 5000$
Her stall policy.
Work a 1,500-dollar loss.
$1500 - 200 = 1300$
Below the limit.
Work a 7,000-dollar loss.
$\min(6800, 5000) = 5000$
The limit binds.
Find what she carries.
$7000 - 5000 = 2000$
On the larger loss.
Check the sum.
$5000 + 2000 = 7000$
Paid plus carried is the loss.
Work policy A with one claim.
$400 + 1000 = 1400$
Cheap premium, large deductible.
Work policy B with one claim.
$700 + 200 = 900$
Higher premium, small deductible.
Work policy A with no claim.
$400$
Premium only.
Work policy B with no claim.
$700$
Premium only.
Read the risk map.
$\text{about one claim a year}$
From the last five years.
Choose the policy.
$900 < 1400$
Policy B, on the claims expected.
Read the terms.
$\text{limit } 20000; \text{ deductible } 300$
And kiln overheating excluded.
Estimate the worst realistic loss.
$12000 + 9000 + 7000 = 28000$
Stock, wheels and kiln.
Work what the policy pays.
$\min(27700, 20000) = 20000$
The limit binds.
Find what she carries.
$28000 - 20000 = 8000$
Under-insured by that much.
Raise the limit.
$20000 \to 30000$
Above the worst case.
Check the exclusion.
$\text{kiln fire: her likeliest serious risk}$
Not covered as it stands.
Close the gap.
$\text{ask the insurer to add kiln damage}$
Cover where it matters.
Work a 2,400-dollar theft.
$2400 - 500 = 1900$
Deductible 500, limit 10,000.
Work a 16,000-dollar fire.
$\min(15500, 10000) = 10000$
The limit binds.
Find what the owner carries on the fire.
Northside Repairs' stock policy has a deductible of $700$ dollars on each claim and pays at most $12000$ dollars for any one loss. A break-in destroys $6000$ dollars of stock. Complete the sentence.
The policy pays p dollars, and the owner carries o dollars.
Complete the worked solution: Bright Home Cleaning expects one equipment claim of about $5000$ dollars this year. Policy A costs $500$ dollars a year with a deductible of $600$. Policy B costs $700$ with a deductible of $300$. Both limits are well above the loss. Find how much less the better policy costs the owner this year.
Add policy A's premium and deductible.
$500 + 600 =$ a
A's cost to the owner this year.
Add policy B's premium and deductible.
$700 + 300 =$ b
B's cost to the owner this year.
Subtract the smaller from the larger.
$(\text{A}) - (\text{B}) =$ d
B is cheaper this year.
Check a year with no claim.
$\text{premiums only: A is cheaper}$
The answer depends on the claims.
Decide on the claims expected.
$\text{one claim a year: choose B}$
Total cost, not premium alone.
Northside Repairs' stock policy has a deductible of $800$ dollars on each claim and pays at most $6000$ dollars for any one loss. Fill in what the policy pays and what the owner carries for losses of $300$, $3100$ and $19600$ dollars.
| Policy pays, dollars | Owner carries, dollars | |
|---|---|---|
| Small loss | ||
| Middle loss | ||
| Large loss |
Bright Home Cleaning compares two equipment policies for a year in which it expects one claim of about $5000$ dollars. Policy A costs $600$ dollars a year with a deductible of $700$. Policy B costs $1300$ with a deductible of $100$. Both limits are well above the loss. Which leaves the owner paying less in the year?
Maya's studio policy costs $1100$ dollars a year, has a $300$-dollar deductible and pays at most $15000$ dollars for any one event. A fire causes $21000$ dollars of damage. What does the year's insurance and loss cost Maya herself, in dollars?
Answer:
A bakery in Houston has a property policy with a $700$-dollar deductible and a limit of $28000$ dollars for any one event. Test it against two losses: a burst pipe costing $3500$ dollars, and a fire costing $38000$ dollars. Fill in the working sheet.
| Amount | |
|---|---|
| Policy pays on the pipe | |
| Bakery carries on the pipe | |
| Policy pays on the fire | |
| Bakery carries on the fire |
Lesson test: one question per skill, one attempt each, no hints. Your answers are checked when you submit.
Neighborhood Kitchen's policy pays at most $13000$ dollars for any one event, after a $500$-dollar deductible. A fire causes $22000$ dollars of damage and lost trade. Complete the sentence.
The policy pays p dollars, and the kitchen carries o dollars itself.
You can read what an insurance policy really covers. Tell someone why the cheapest premium can cost more. Next: keeping useful records.
17. Your turn: Northside Repairs, step 3
$16000 - 10000 = 6000$
Time to raise the limit.