Business Insuarence

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Особенности страхования бизнеса, международный опыт. Информация предоставлена на английском языке.

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       Business insurance is a risk management tool that enables businesses to transfer the risk of a loss to an insurance company. By paying a relatively small premium to the insurance company, the business can protect itself against the possibility of sustaining a much larger financial loss. All businesses need to insure against risks—such as fire, theft, natural disaster, legal liability, automobile accidents, and the death or disability of key employees—but it is especially important for small businesses. Oftentimes, the life savings of the small business owner are tied up in the company, so the owner must take steps to protect his or her family from the financial consequences of events that could disrupt operations, reduce profits, or even cause the business to go bankrupt. Insurance can help a small business be successful by reducing the uncertainties under which it operates. It places the economic burden of risk elsewhere so that managers can focus their attention on running the business. In addition, the premiums paid for many types of insurance are considered tax deductible business expenses.

       Many large corporations employ a full-time risk management expert to identify and develop strategies to deal with the risks faced by the firm, but small business owners usually must take responsibility for risk management themselves. Though it is possible to avoid, reduce, or assume some risks, very few companies can afford to protect themselves fully without purchasing insurance. 



            Chapter 1: The History and Evolution of Business Insurance


       When you think of insurance, you probably think of things like procedures, forms, TV commercials, and so on. It's a structured industry with a set way of doing things that most of us have some familiarity with in one way or another.

       Yet the concept of insurance is in fact much simpler and goes back to as early as civilization itself. When a house burned down, neighbors would essentially come to your service and help you build a new one. When merchant ships were at the mercy of piracy, other merchant ship owners would get together and devise strategies to minimize risk and help each other out in the case of an accident or disaster.

       In other words, like much of what we see in modern society, insurance evolves over time and has its roots founded in simple needs with simple solutions that get complex over time. It's easy to forget that because insurance, probably more than other industries, has become so structured. Yet its fundamental principles are founded in basic human nature. Things happen and societies need to implement ways to deal with problems when they do happen. In the end, it's nothing more complex than that.

       Of course, over time, friends helping friends or business associates helping business associates aren't enough. As economic systems become more complex, and much more risk is involved with the size and number of business transactions, the need to cover that risk becomes more complex as well. As society evolves, the ways people try to insure themselves from risk also evolves.

       Perhaps the first more formalized instance of what can be considered insurance occurred when British merchants decided to finance some of the more dangerous voyages overseas. In other words, business property was underwritten. It's thus worthy to note that the origins of insurance are rooted in a form of business owner insurance. This probably isn't surprising. Shrewd business people devise ways of protecting their investments. There's probably nothing more precious, and perhaps nothing more potentially lucrative, than sailing off to a new world and new profit opportunities. Insuring those opportunities just makes smart business sense.

       In fact, it was underwriters who not only first started perfecting the art of providing insurance to individuals and business; it was underwriters who were in fact responsible for selling it. Yet, as in all things in a developing economy, the need for specialization kicks in. Underwriters needed to be good at underwriting, someone else needed to be good at actually selling the policies to individuals. This is where agents first appear. And we're familiar with them and what they do to this day.

       Yet the first insurance company wasn't formed until 1667, a year after the great fire of London. It's probably not surprising that the capital of the world's most expansive financial empire is the birthplace of what can be considered the modern insurance company. A city grows. Financial transactions become that much more complex and profitable. All of it literally goes up into flames after a disaster like the great fire. It's why Nicholas Barbon opened what was known as "The Fire Office" to insure homes. In other words, it was the beginning of what we know today as property insurance. And what business owner insurance policy would be worth its weight in paper unless it contained property insurance, right?

         Benjamin Franklin is a name we're all familiar with in American history. What some may not know is that it was Benjamin Franklin who started the first insurance company in the United States in 1752. It was called The Philadelphia Contributionship for the Insurance of Houses from Loss by Fire. Just as with the Fire Office in London, Franklin's company was formed to deal with the risk of loss due to fire. However, unlike Nicholas Barbon, Franklin refused to insure homes made of wood. So it's probably not surprising that one of the most respected minds in American history was also one of the first to engage in shrewd risk management when it comes to the setting of insurance claims policy.

       So, the establishment of the insurance industry is pretty straight forward. Stuff happens. Most notably, fires happen. And individuals of all kinds, including business owners, have a need to insure themselves from loss in the event that they fall victim to a fire. Pretty straight forward.

       With respect to business owner insurance, the story is essentially the same except applied somewhat differently and with a bit more specialization. As was mentioned earlier, the very first forms of what could be considered insurance were in fact a type of business owner insurance. Even property insurance is a form of business owner insurance. Most businesses own an array of assets that need to be protected from loss. Therefore, the origins of the insurance industry itself are intertwined with the needs of businesses in general.

       Of course, as time moves on, and economic systems become more complex and specialized, the kinds of insurance needs associated with doing business become more complex and specialized, too. Its why, over time, essentially two entities have developed to try and meet the needs of business in general. The first is liability insurance, which essentially protects businesses from the risk of loss due to a lawsuit. The second is the Business Owner's Policy, or BOP, which is essentially a bundle of insurance coverage meeting the needs of business owners in general. Together, liability insurance and the BOP can be seen as the two pillars of what's generally known as business owner insurance.

       The need for insurance should now be obvious. Yet, as great as that need is for individuals and businesses in general, think about the kinds of risk and potential losses associated with running a corporation. With corporate scandals like Enron consuming the news in recent years, it's not hard to imagine that even they need to protect themselves from liability associated with running such a large entity and potentially impacting millions of people around the globe.

       One of the earlier developments in business insurance was the passing in Britain of the Workmen's Compensation Act of 1897. This essentially required that all corporations insure their employees from the financial losses incurred due to industrial mishap. This eventually laid the foundation for corporate liability insurance, in which all "mishaps" associated with the conducting of business were covered as a matter of practice.

       Just as fires precipitated the need for insurance coverage in both Britain and the United States, there was also something that precipitated the evolution of business owner insurance and corporate liability insurance in the twentieth century. It was the automobile.

       Think about it. How often do we hear of recalls of one kind or another occurring within the auto industry? Probably more relevant, we've also been witness to some major class action lawsuits as a result of something going wrong with something in the auto sector. The most high profile example in recent memory was defective tires. Not only were the tire companies liable for millions in lawsuits, so were the automobile companies who sold their cars with these tires installed on them.

       This is why one can never underscore enough the importance of the development of corporate liability insurance and liability insurance in general. For any business owner, it's literally hard to imagine just how many people are touched by what you do. Think about it. You provide a service or a part to someone. They provide it to their clients. They, in turn deal with a public, who might turn around and use your product and service with someone else. The possibilities are almost endless. The extent to which something a business does can impact a public is formidable.

       Now shift that concern over to a corporation. If a small business can touch a public in countless ways, think about just how much exposure to liability is involved with a business that generates millions or even billions in revenues a year.

       And when we're talking about corporations, are there any that expose themselves to more risk than car companies? Think about how embedded in our way of life is the automobile. Also think of how many accidents and mishaps happen with cars, and the kind of loss that can happen when something goes wrong with a speeding hunk of steel traveling on a large urban expressway. The extent to which car companies, and all their associated businesses, expose themselves to loss from lawsuit is tremendous. It's in part how corporate liability insurance evolved into the entity it is today.

       Following that, perhaps no development in corporate insurance has made a greater impact on the industry than the Enron-type scandals mentioned above. Today's corporate environment is one where there is very little forgiveness given to businesses who cost their customers sometimes billions of dollars due to some type of malfeasance or another. Even insurance companies are getting in on the act themselves as they sometimes threaten to or even outright deny coverage in these instances. In the end, it's often about public opinion. And, right now, when it comes to corporations appearing to bilk customers out of huge amounts of cash, the corporations are seen as the bad guys. That's just the reality.

       It's also why, at the current point of history that business owner insurance finds itself in, it's never been more important for corporations to get the right kind of corporate liability insurance to protect their interests. Board members, CEO's, and directors are all at risk to these lawsuits, and insurance companies are covering their own interests in relation to these like they never have before. Corporations seeking the right liability insurance for their firms need to make sure they don't get left in the cold even if they have the insurance they thought would cover them. You have to make sure you have the insurance that will cover you and your corporation. It's really as simple as that.

       The history of business owner insurance and corporate liability insurance, not surprisingly, is intertwined with that of the insurance industry in general. The concept of insurance really goes back to when people started to interact with each other in societies. As these societies grew, the property and interests of people and businesses had become at risk to loss. It's why insurance companies started to form, especially in reaction to fires that could consume entire cities. Yet, just as a fire can consume a city, a lawsuit can consume a corporation. Whether it is automobile mishaps or corporate malfeasance, the kind of business owner insurance and corporate liability insurance needed today is just part of the ongoing history of insurance in general.


                    Chapter 2: Types of business insurance:


            1.1 Directors and officers liability insurance 

         Directors and Officers Liability Insurance (often called D&O) is liability insurance, payable to the directors and officers of a company, or to the organization(s) itself, to cover damages or defense costs in the event they suffer such losses as a result of a lawsuit for alleged wrongful acts while acting in their capacity as directors and officers for the organization. Such coverage can extend to defense costs arising out of criminal and regulatory investigations/trials as well; in fact, often civil and criminal actions are brought against directors/officers simultaneously. It has become closely associated with broader management liability insurance, which covers liabilities of the corporation as well as the personal liabilities for the directors and officers of the corporation.

         Under the "traditional" D&O policy applied to "public companies" (those having securities trading under national securities exchanges), there are three (3) insuring clauses. These insuring clauses are termed: Insuring Clause 1 (Side-A); Insuring Clause 2 (Side-B); and Insuring Clause 3 (Side-C). Contemporary (competitive) D&O policies also provide for Insuring Clause 4 (Side-D), which provides for a $250,000 sublimit for investigative costs coverage related to a shareholder derivative demand.

       Side-A (Insuring Clause 1) provides coverage to individual directors and officers when not indemnified by the corporation (as a result of state law or financial capability of the corporation) Side-B (Insuring Clause 2) provides coverage for the corporation when it indemnifies the directors and officers (corporate reimbursement) Side-C (Insuring Clause 3) provides coverage to the corporation itself for securities claims brought against it.

       Note - more extensive (broader) coverage can be obtained for individual directors and officers under a Broad Form Side-A DIC ("Difference in Conditions") policy purchased to not only provide excess Side-A coverage but also to fill the gaps in coverage under the traditional policy, respond when the traditional policy does not, protect the individual directors and officers in the face of U.S. bankruptcy courts from wrongfully deeming the D&O policy a part of the bankruptcy estate and otherwise more fully protect the personal assets of individual directors and officers.

       At its roots, D&O insurance insures "behavior" in that the decisions of directors and officers are the matters which often lead to covered claims. That is, an incorrect decision often leads to shareholder discontent and, thus, a lawsuit against the directors and officers who made the decision. State law typically protects the directors and officers from liability (particularly exculpatory provisions under state law relating to directors) but this does not mean that actions are not brought by private plaintiffs (aggravated by the loss of money and seeking a quick payout from insurance proceeds). As such, even innocent errors in judgment by executives will bring D&O insurance into the forefront of the matter; especially because most "D&O" claims are settled before going to trial. The key, apparently, is the motion to dismiss stage of civil litigation (at least in the U.S.A.).

       Typical sources of claims include shareholders, shareholder-derivative actions, customers, regulators (including those that would bring civil and criminal charges), and competitors (for anti-trust or unfair trade practice allegations). The extent of coverage is dramatically dictated by the fact the company is publicly traded or privately held. For instance, publicly traded companies (themselves) are only covered for securities claims.

       In terms of basic state corporate law (at least in the U.S.A.), directors and officers of a corporation can be liable if they damage the corporation by breaching their duties and contracts to the corporation, mix personal and business assets, or fail to disclose conflicts of interest. In the United States, under state corporate law, corporations are often mandated to indemnify directors and officers of companies incorporated in that state in order to encourage people to take the positions. That being said, there exist extensive situations in which either the corporation is only permitted to indemnify the director or officer or the company is explicitly forbidden from indemnifying such director or officer. Liabilities which aren't indemnified by the corporation are potentially covered by certain types of D&O insurance (particularly Side-A Broad Form DIC policies).[2] However, the policies have exclusions and must be read carefully.

       D&O insurance is usually purchased by the company itself, even when it is for the sole benefit of directors and officers. Reasons for doing so are many, but commonly would assist a company in attracting and retaining directors. Where a country's legislation prevents the company from purchasing the insurance, a premium split between the directors and the company is often done, so as to demonstrate that the directors have paid a portion of the premium. Problems related to income tax liability may come into play when a corporation avoids country specific liability law in order to protect its individual directors and officers through insurance.

       A common misperception of D&O insurance is that it makes directors or officers able to engage in acts they know to be wrong; this is not the case. Intentional illegal acts or any illegal gains/profits obtained by directors/officers are not covered under most D&O insurance policies; coverage would only extend to "wrongful acts" as defined under the policy, which may include certain acts, omissions, misstatements while acting as a director/officer of the organization. Exclusionary language, however, would not provide coverage for fraud, illegal profits/gains, or intentional/wanton illegal conduct by such director/officer (as examples).

       The basic principle underlying the acceptance of D&O insurance is that companies (and their shareholders) are best served by knowledgeable directors and officers who take strategic risks based upon the information reasonably available to them at the time the decision is made, without the threat of personal liability. By doing so, it is believed, corporations are better able to attract qualified, intelligent, and reasonable directors and officers to manage the operations of the company. Not only would this result in better returns for shareholders but also benefit society in general (due to the increased productivity, jobs created, and advancement of products due to such calculated business decisions). Under the law of states in the U.S.A. and most capitalistic based economies, directors and officers are not "insurers" of their business decisions made in furtherance of the company they serve. This includes the advancement of not only the shareholders, but also the company itself, its customers, and the constituents of the company (such as employees, a particular town, community, charity etc.). In addition to D&O insurance (which fills the gaps), state law ensures that reasonable, calculated, and well-processed decisions (see "business judgment rule"), that are made by the executives of a company, will be made without fear of personal financial loss should their well thought-out plan not come to fruition. As practical and sound as that proposition may sound, it is still within the power of states and individual companies to deny such executives indemnification for claims that arise out of their well intended efforts. As a result, D&O insurance exists.

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