Self-insurance – is it worth the risk?

Consider self-insured risk as self-defense in court. If you’re bright and know how to form an argument, there’s a good chance that you can defend yourself in traffic court, or you might hold your own in pursuit of a small claims case if you should ever need to. In fact, hiring a lawyer for either of these instances might cost more than the damages you’d have to pay, or the rewards you might see. One of the most famous pro se cases on record was when Robert Kearns, inventor of the intermittent windshield wiper, sued Ford and Chrysler for patent infringement. The case is immortalized in the movie, Flash of Genius.

If you were a pre-law major in college, and keep up with the law, you may be able to navigate your way through the sale of a home, or a small business contract. Once you get into bigger issues – like a divorce, a large land contract, or any kind of serious law suit – it’s probably time to call a lawyer.

This is how businesses should think about self-insured risks. There are many risks that a business can feel good about self-insuring – risks that aren’t at all likely to happen that can be covered by a slush fund if anything ever did happen. On the other hand, there are risks that are very likely to happen and/or may happen frequently. There are risks that aren’t very likely to happen at all, but if they did, the results would be catastrophic to the business. These types of risks should be insured. But how can you know you have the proper insurance in the first place?

Identifying and insuring self-risk

Sometimes, companies aren’t aware of risks they face. This is the worst kind of self-insured risk as it presents a sort of blind self-insurance. It’s a very good idea to hire a third-party to come in and take a look at your current coverage and identify any self-insured risks your business is facing and make sure your business could handle the loss if they ever occurred.

A thorough look at your business might turn up some surprises. According to the United States Geological Survey, Memphis, Tennessee, is located in an area that’s only moderately likely to experience an earthquake, but if it does, the damage could be particularly catastrophic because of the lay of the land. Statistics like these are the reason you need an actuary around to calculate the likelihood of all the common occurrences and then take a look at all of the pie-in-the-sky eventualities that could potentially happen to your business. Actuaries work with insurance professionals to provide you with a big picture of what all your risks are, and what kind of coverage you should maintain to keep your business well out of danger.

When traditional insurance can’t cover you

When you find you’re self-insuring because you just can’t get the coverage your business needs – or you can’t afford it – consider starting a captive. Captives allow you to write insurance policies that are more specific to the needs of your own business.

In sit-coms and on dramatic law TV shows it’s never a good sign when a character decides to defend himself. Usually, the dramatic device in play is that of someone who believes they are much smarter than they actually are (in comedies) or someone who is under the delusion that they’re smarter than everyone else (in drama). A little bit of self-insurance is good – but avoid comedy and tragedy by knowing when you need some expert help. Contact us if we can provide some interpretation.