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this would come at the risk making customers sick or
facing a very bad health inspection, either of which could
be disastrous for the business. Risking financial disaster
to save a few dollars of expense would be a bad business
decision^1 (not to mention the bad ethics of putting your
customers’ health at risk). The restaurant manager has the
power to control this risk, though; by choosing to fol-
low appropriate health and safety practices, the risk of a
disastrous outcome can be minimized.
It is of course just good business management to take
care to avoid unnecessary risks. It is impossible, though,
to avoid risk altogether. It is always possible that despite
every prudent precaution, something unfortunate will
happen due to oversight, someone else’s actions, or just
plain bad luck. It is necessary to be able to find ways
to protect our businesses (and ourselves!) from potential
bad consequences of those risks which we cannot avoid.
Insurance is a financial tool for accomplishing this. Of
course insurance cannot prevent bad things from happen-
ing, but it can provide money to help pay the financial consequences when they do.
As you are no doubt well aware, there are many different types of insurance, each
designed to deal with a specific type of risk. In this chapter, we will take a look at several
of the most common types, and their uses for both business and personal finance. We will
begin by looking at various types of property, casualty, and liability insurance. Insurance
that falls into this broad category includes business and professional liability, disability,
automobile, homeowner’s, flood, earthquake and malpractice insurance, as well as many
others. In fact, it is probably easier to define this category by what it does not include rather
than what it does. Life and health insurance are not included in this category, though life and
health insurance products do have much in common with these other types of insurance.
Insurance contracts can be purchased for all sorts of risks, ranging from the everyday
risks we all face (such as the risk of a fire or storm damage or car accident) to incredibly
specialized policies (such as the risk that a college athlete with a promising future as a
professional might suffer a career-ending injury while still playing at the collegiate level).
A treatment of the full spectrum of insurance products, and the issues surrounding those
products, lies far beyond the scope of this book. In this chapter, though, we will consider
the basic principles, opportunities, and challenges that businesses and individuals face in
the insurance market.Basic Terminology
An insurance policy is a financial contract in which an insurer promises to pay specific
financial benefits to an individual or business, called the policyholder, if and when certain
events (called covered risks or covered events) occur. The policyholder pays the insurer
a premium in exchange for this coverage. If a covered event occurs, the policyholder files
a claim with the insurer, requesting the financial benefits due under the terms of the policy.
The insurance company may send a claims adjuster to verify the circumstances surround-
ing the claim, and to determine the amount of the benefit that is to be paid.
Insurers may be organized as mutual companies or as stock companies. A mutual
insurance company is owned by its policyholders, whereas a stock company is a corpora-
tion owned by investors. A mutual company is operated to provide insurance protection
to its policyholder/owners, but not to earn a profit for any investors. If a mutual companyInsurance can’t stop bad things from happening, but it does provide
the fi nancial means to recover from them. © U.S. Air Force photo by
Master Sgt. Michael A. Kaplan/DIL(^1) Just because something is a bad decision, though, doesn’t mean that no one will ever make it. It is not hard to fi nd
examples of businesses that have failed and/or caused serious problems for their customers, employees, and community
by taking shortsighted risks.
13.1 Property, Casualty, and Liability Insurance 523