Successful companies understand that managing risk is an essential part of their success. Despite your company’s success and profitability, no amount of planning can reduce all potential risks. Risk avoidance, or outright elimination of all factors that involve the risk, is not a realistic option for many businesses.
In reducing the likelihood of risk, such as installing cameras and alarm systems to deter burglars, successful companies are also adequately insured. Purchasing insurance is a classic risk transference tool in which businesses can “pass the risk” to a third party, such as an insurance company.
Filing a claim under a commercial insurance policy is a regular part of operating a business. However, we’ve discovered that few individuals genuinely understand how these claims work. We’re here to change that. Founder Shield and Scale Underwriting have teamed up to bring you a four-part Claims Series, demystifying the claims process and using insurance as a risk management tool. In this first portion, let’s examine the anatomy of a commercial insurance claim.
What Is a Commercial Insurance Claim?
Commercial insurance is a tool that protects businesses from financial losses. An insurance policy is essentially a contract for financial protection. It is a legally binding promise by an insurance company to financially protect the insured for specified losses if they occur in exchange for a premium paid by the insured.
When an insured provides its insurance company with notice of a “claim,” it is an official request for reimbursement against losses agreed to under their insurance policy.
What Triggers a Commercial Insurance Claim?
What triggers a commercial insurance claim depends on the insurance policy. Every commercial insurance policy defines what, when, and how coverage occurs. The most common types of claims we see fall into the following categories:
- Liability (i.e., cyber, financial, etc.)
- Bodily injury
- Property damage
- Business interruption
How Does Claims Processing Work?
Although the basics of claim-filing haven’t changed much, the process has. Evolving technology allows clients to submit claims via apps, track real-time data, and receive payouts quicker than ever.
Personal Insurance vs. Commercial Insurance
Remember, business insurance claims play out differently than a personal auto or homeowners claim. Of course, the insured still submits information regarding the loss or damage, and the insurer investigates the claim, approving or denying it. An insured should still be familiar with their deductible and decide whether it’s worthwhile to file a claim (and pay the deductible) or cover the loss out-of-pocket.
However, commercial insurance claims aren’t usually the simple $500 fender benders. Instead, the average data breach — potentially covered in a cyber policy — costs US companies more than $4 million. And commercial insurance claims are more likely to be complex.
For example, a cyber liability claim can trigger directors and officers (D&O) litigation, costing companies hundreds of thousands of dollars. This scenario often plays out if they were not adequately insured or failed to promptly notify the claim to all potentially relevant insurance carriers because they didn’t realize the claim triggered multiple policies. We’ve seen businesses shut down for lack of insurance and even for inadequate insurance.
A claims process occurs differently according to the circumstance or event, giving rise to the loss and policy type. There are two main types of policies: claims-made and occurrence insurance. These two types have a few differences that set them apart, thus, triggering commercial insurance claims differently.
- Coverage time frame: A claims-made policy only protects you from losses that both happen during the policy year and are reported while the policy was in force.
- Premium cost: Claims-made policies typically cost less initially but increase over the first five years until the policy reaches “maturity.”
- Tail coverage: Some insurers offer tail coverage or extended-reporting period (ERP) as an option—but only for claims-made policies. A “tail” allows you to file a claim even when the policy has expired but still within the retroactive date.
- Coverage time frame: An occurrence policy typically protects you from losses that happen while the policy is active.
- Premium cost: Occurrence policy premiums tend to cost more upfront but characteristically remain the same throughout the life of the policy—unless a significant change plays out.
- Tail coverage: Occurrence insurance policies don’t require tail coverage because the policy provides lifetime coverage anyway.
Insurers develop new products for emerging losses daily; however, no one has figured out a way to eliminate the “same old, same old” losses that businesses have always faced. For this reason, high-growth companies must navigate many challenges — but you don’t have to do it alone.
Jonathan Selby, General Manager at Founder Shield, offers this advice, “Claims can sometimes feel like a double-edged sword, with worries of skyrocketing premiums or slap-in-the-face denials. So, how does the business owner know when to turn to their insurance for coverage? The short answer is to turn to your insurance broker for guidance.”
Understanding the details of what coverage your company needs can be confusing. Founder Shield specializes in knowing the risks your industry faces to make sure you have adequate protection. Feel free to reach out to us, and we’ll walk you through the process of finding the right policy for you.