Types of Business Insurance | Personal Financial Planning | Dr Sanjay Tolani

What is business insurance? A business insurance is an insurance contract that basically would cover your businesses from all the different types of risk that businesses face. So the primary business risk that you should be looking at is loss of profits, loss of manpower, loss of assets, liability cancellation. These are your four primary types of business insurances and this is what business insurance is all about. So what are the different types of business insurances? The first most important type of business insurance is what we call loss of profit insurance. When any business owner is conducting a business, their biggest fear is loss of profit. Now loss of profit can usually happen due to business continuity risk, which means I'm not able to continue my business activity and therefore I lose my profit. An example of this would be, let's say I have a warehouse and in that warehouse, I store a lot of goods, but unfortunately the warehouse catches fire. So I've just lost two things. One, I've lost my asset, which is my warehouse and the stock, but I've also lost something called profit. So if there's a fire in my warehouse, I cannot continue doing my business activities and I would have something called loss of profit. So there is a different type of insurance called loss of asset. Loss of asset is similar. For example, you own a building and the building collapses due to an earthquake. That is what we call loss of asset. But you have two losses right now. You have the loss of asset, which is the building itself. You have loss of profit, the income that you are generating because of that building. So you have two different types of business insurances, loss of asset, loss of profit. The third type of insurance is what we call loss of human resources. So if you lose human capital, which is also an investment, you would also get compensated for that. I'll give you an example. You have a very important CEO. The CEO is taking care of a lot of your business activities. What happens if you lose that CEO? Now, let's take a very crude example. Your CEO is traveling in the Rolls Royce of your company. All of a sudden, the Rolls Royce has an accident. It's completely damaged and the CEO passes away. The company just lost two assets. The first asset is you lost the Rolls Royce, which is a company car. The second is you lost your CEO. In this scenario, you have actually had two losses, not just one. Now, which is a bigger loss? The loss of your Rolls Royce or the loss of your CEO? The other question is which of them is actually insured? So that's something that we need to understand. This is what we call key person insurance. If there are certain key members in your company which would affect the company from operating in the future, you need to insure these people from two primary factors. One is if they fall sick, who takes over the responsibilities and loss of profit during those days? And number two is in case they pass away, what is the damages to be able to find a replacement of that person? The company has a very big loss. So it's easy to replace certain physical assets, which is easy to insure. But sometimes you lose the intangible assets like human resources, human capital, key people. And that is what we call key man insurance or key person insurance. The fourth and the most common type of insurance is what we call liability insurance. Liability insurance is if the company has a liability. So, for example, I walk into your showroom and there's water on the floor and I slip and fall and I injure my back. I can sue the company for physical damages because there was no wet floor sign. There was what we call negligence. So nobody actually, someone neglected and left water on the floor and I slipped on that water. That's what we call liability insurance. So if you are a business owner, there are four primary types of insurances that you need to look at. Liability insurance, asset insurance, key person insurance, and loss of profit insurance. These are your four primary categories of business insurances.