Page 512 - Business Principles and Management

Chapter 18 • Credit and Insurance

insurance, individuals can provide some financial protection for their families in the
event of their death. Some companies provide a specific amount of life insurance as
a standard part of employee benefits. Others offer the opportunity for employees to
purchase life insurance but the employees must pay most or all of the cost.
Many businesses insure the lives of owners and key managers because of
their importance to the financial success of the business. In the case of sole pro-
prietorships, owners usually find it easier to borrow money if they carry adequate
life insurance on themselves. Life insurance has an especially important place in
partnerships. Generally, a partnership is dissolved upon the death of one part-
ner. Each partner usually carries life insurance on the other partner, so that if
one dies, the other will receive, as beneficiary of the insurance policy, sufficient
money to buy the other’s share of the business.

CHECKPOINT

What is the difference between health insurance and disability
insurance?

Other Business Insurance Needs

In addition to insuring business operations and people, businesses often buy
insurance to cover special types of risk. Two such special needs are liability
insurance and bonding.

BUSINESS OPERATIONS
Businesses face many risks that result from the operation of the business. People
may get hurt while on the job, products may cause damage or injury, and em-
ployees may do things that damage people or their property. Liability insurance
protects against losses from injury to people or their property that result from
the products, services, or operations of the business. For example, if a toy in-
jures a child, the child’s parents may sue the toy manufacturer. Liability insur-
ance would protect the company in such circumstances.
Clients sometimes sue professionals, such as lawyers and physicians, who
provide personal services. Malpractice insurance is a type of liability insurance
that protects against financial loss arising from suits for negligence in provid-
ing professional services. Malpractice claims are a major cost to professionals.
Even if the businessperson is not guilty of malpractice, the legal fees can be
very high.
Some businesses need a special type of insurance protection called bonding.
Bonding pays damages to people whose losses are caused by the negligence or
dishonesty of an employee or by the failure of a business to complete a contract.
Bonding is often required for contractors hired to construct large buildings,
highways, or bridges, and for companies such as Wells Fargo that transport
large sums of money between businesses and financial institutions.

INSURANCE FOR INTERNATIONAL OPERATIONS

Many businesses operate or sell products in other countries. Insurance policies
typically do not cover losses or liability resulting from international operations.
Special coverage may be available at additional cost within existing insurance

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