I’ve worked in insurance for a few years now. Still, as a communicator and marketer, I don’t always get the exposure to the real ‘bones’ of the operation. My job is to explain things to people in an easy to understand way and have them feel confident that we can get them the right insurance for their needs. While I feel like I have a bit more knowledge about the industry than the average person, I’m still learning new things all the time as I work on different projects and initiatives with our team.
Sometimes it feels like insurance professionals are speaking their own language—even regular words can have a different meaning when used in insurance. So this year, I’ve decided to take a step to enhance my understanding of this industry by taking a General Insurance Essentials course. I thought I might glean a few insights, but overall I’d just review things I already knew. Between spending almost five years working in this industry, and buying insurance for my personal needs, I thought I had it covered. But let me tell you, so far it’s been eye-opening. I realize there’s a lot I never really knew about insurance. So, let’s start at the beginning.
What is insurance really?
Officially, the definition is “a contract in which one party, the insurer, agrees to reimburse another, the insured, for loss or liability for a loss on a defined subject caused by specified hazards or perils.” Well, I’m sure that cleared things up for us all. See what I mean when I say insurance has its own language?
Let’s break it down a little. At its core, insurance is based on the existence of risk in our everyday lives. We choose to take risks all the time—participating in sports where we might get injured, not studying for a test, or starting a new business venture. But we take unconscious risks too. We go out to a restaurant to eat and then get food poisoning, hop on our bike, not realizing the brakes aren’t working, or cross the street without seeing the car speeding towards us. What all of these things have in common is that when we take them on, there is a possibility of loss. We could get hurt or sick, lose money, fail.
However, not all risks can be insured. If they could, I think we’d all probably take more of them. The primary type of risk that can’t be insured is called ‘speculative risk.’ These are situations when there is a chance of loss, but there is also a chance of profit. Things like starting a business—where your success is determined mainly on your skills as an entrepreneur and the economy—would be considered a speculative risk. While you can get insurance to cover you if your business is broken into or burns down, you can’t insure whether or not your business makes money, that’s up to you.
What kind of risk is covered?
The risk that insurance protects from is pure risk, which falls into three general categories: personal risk, property risk, and liability risk.
Personal risk is pretty simple. It covers your actual, physical person from injury, income loss, or death, because of accidents, illness, old age, and unemployment. Where it gets a bit more complicated is with property risks and liability risks.
There are actually two types of losses that would be covered under property risks: direct and indirect. A direct loss would be like the “losses due to things like fire or theft” example I gave earlier. The loss is a direct result of the event, so your insurance would cover the costs of rebuilding your home due to a fire, or replace your stolen car.
But these direct losses can also cause indirect damage, which can be less obvious. If you owned a store and it burned down, then you would lose the income you would have made, while it is closed for repairs. These indirect losses can also be covered by insurance so that you don’t end up losing your business in the process of rebuilding it.
The final type of risk, liability, is probably the hardest to understand. Liability is one of those terms you hear thrown around by lawyers in movies. While you generally get what it means, it can be challenging to wrap your head around. Liability risks are basically the chance of loss due to someone else’s negligence. So if someone forgets to shovel and salt their sidewalk and you slip on the ice and get hurt, or you received a defective product that makes you ill, the homeowner or manufacturer will be liable to pay you for any damages caused by them.
Whether it’s because we want to protect ourselves, or because the law requires us to, we all know we need insurance. But, it’s not always easy to understand. There’s no one-size-fits-all when it comes to what insurance you need because we all face our own unique risks. That’s why it’s important to ask questions and work with a broker you trust so you can get the right insurance for you and your business.
