What is Commercial Insurance?

A business is prone to risks coming from all directions – counterparty risk, liquidity risk, solvency risk, currency risk, and so on. While the management team is consistently working to grow the businesses, some of these risks often get missed. And the loss arising from such challenges can erode the performance, equating to several quarters or even years. Commercial insurance is a clever mechanism for managing such risks. It is an insurance cover designed for businesses of all scales and sizes across industries.  

What is Commercial Insurance?

Answering what is commercial insurance is as good as answering what is personal insurance. The latter protects an individual's health and interests, while the former defends the health and interests of an enterprise. The businesses may want to secure their assets, inventory, and other revenue-generating items. The business might be running in a financially stressful situation and is not interested in burning its cash reserves. The business might have good internal risk management practices and hence is looking forward to shielding its interests from unforeseeable risks. All the motives are considered plausible for getting commercial insurance.  

What are the Benefits of Getting Commercial Insurance?

Getting the answer to what is commercial insurance is often evaluating what kind of benefits a business can get from it. Here are the most common benefits a business can avail from a commercial insurance cover:  

1. Reduce Counterparty Risk for Your Trade Partners.

Suppose you are a significant supplier to a company. Suppose your inventory which was to be delivered to their warehouse, gets burned in an accident in your warehouse. In that case, they will also have a business continuity risk since their processes may now come to a halt. Commercial insurance would have saved your business from any claims made by the company and compensated you to recoup some of the inventory cost.   Such incidents can create a ripple effect and impact the operations of upstream and downstream companies. A commercial general liability insurance contract can provide liquidity in such events and soften the blow of the risk.  

1. Create an Emergency Pool Outside Your Cash Reserves.

Some businesses have a very well-managed treasury operation with adequate cash reserves for practically every scenario. However, commercial insurance gives the business an alternative to protect its cash reserves and still take corrective action with the insurance payout in an unforeseeable situation.  

1. Protect the Interests of the Firm Against Management Misdemeanours.

Some specific insurance products safeguard the firm's interests against management team members like the directors and other C-Level executives. By having commercial insurance in such a situation, the firm’s lenders and investors are protected against claims of negligence or breach of contract allegations made against the board's key members or the management team.  

1. Secure the Baseline Revenues from Goods in Transit.

For some businesses, transporting finished or unfinished goods is an inseparable part of the business. For such operations, commercial insurance can provide sufficient cushion against war, fire, pirates, and damages induced by other sources while the goods are in transit.  

1. Shelter the Investments Made in Fixed Assets.

The firm’s plant & machinery, office building, and land are often considered its fixed assets. Any damage to these assets can bring in additional expenses such as repairs or replacement costs, directly hammering the revenues and reserves. Commercial insurance can provide compensation against such unlikely but damaging scenarios.  

Who Should Get Commercial Insurance?

Ideally, every small, medium and large scale enterprise must get commercial insurance. However, the following businesses can particularly benefit from a commercial insurance cover:

1. Import and Export Houses: Businesses frequently using marine, cargo or other logistical means to transport goods. Eg. A marine insurance policy can be employed to cover damages during transit via ships.
2. Businesses Primarily Engaged in Manufacturing: Any business with land, building, and plant & machinery as its fixed assets on the balance sheet.
3. Businesses with Considerable Inventory on Hand: Any business that keeps inventory under its control. This includes inventory held by intermediaries like warehouse operators, logistics service providers, and traders.
4. Businesses Run by a Professional Management Team: If the business has a board of directors and a management team, it should ideally have a commercial interest protecting its interests.

 

FAQs

1. Does commercial insurance protect individuals?

No. Commercial insurance is designed for all the liabilities the business may face. For instance, if a worker gets injured on the factory floor and the business has a commercial insurance cover, the business will get compensated. The business can further pass-on the benefits of the insurance as per its obligation to the employees.  

1. Can any business get commercial insurance?

Theoretically – Yes. Any business that meets the specific requirements of an insurer's commercial insurance product can get it. However, the quantum of this insurance will depend on the scale of the business, its financial history, and its management team's credibility.