First, What is "Risk"?

Probably something you encounter on a regular basis. Risk is the uncertainty of loss. It is not knowing when or how a loss of property or income will occur. This uncertainty can be dealt with in three different ways. Risk can be handled by avoidance, acceptance or transfer. Don't buy a car or home, don't start a business. All are ways to avoid risk, but probably not very practical. You can accept risk by funding any losses yourself. We do this all the time especially through deductibles or self retained portions of a risk. This is generally referred to as 'self insurance'. Sometimes we end up being a self-insurer unexpectedly! This happens when an insurance purchaser becomes a co-insurer because of improperly requested insurance values on commercial buildings or homes. The final, and most common method, is risk transfer.

Risk transfer is accomplished by passing your risk on to a professional risk bearer. An insurance company! For a small sum certain (the premium), you transfer the uncertainty of a loss of a greater magnitude to an insurer. The insurer will play the law of large numbers and 'pool' your risk with other similar risks. Your individual risk will be examined-or underwritten-to make certain it is acceptable to be pooled with the other units.

After your risk has been accepted the conditions and terms of coverage must be decided. What 'perils' will be covered, how much liability will be assumed and what the 'risk' consists of will all be factors in determining your cost to transfer. The consumer will have a very direct impact on how much the cost will be. Safety records and loss control programs for businesses, driving records for car insurance, maintenance and upkeep for home insurance; these and many more purchaser controlled factors can add to the cost of transfer.

Once all the terms and conditions are set and a price has been determined a transfer of risk can be completed. After this, should the reason for the transfer occur—an accidental and unexpected loss occurs. This is when all of the purchase decisions and coverage conversations come under the microscope! Are the coverage perils requested broad enough? Is the limit of liability asked for sufficient? This is the time when a claim is either finalized smoothly or disputed! Care taken when purchasing coverage can generally result in the smoother path. Montana courts generally recognize that your insurance agent has an obligation to provide the coverage you requested. If coverage is not available the agent must inform you. It is therefore very important to make your insurance buying decisions based on a solid understanding of the terms and conditions of the coverage.

Article By: Dennis Gambill - The author is an Insurance Litigation consultant. Adjunct professor at EMC for 8 years-Risk & Insurance. 40+ years-both MGA and agency experience.