A Bakery Weighs Insurance Against Risk
A Nassau bakery occupies a rented building worth B$250,000, holds B$40,000 of ovens and mixers, and carries B$15,000 of stock. It employs six staff and delivers to hotels in a van worth B$28,000. The owner has B$12,000 in savings and an annual profit of B$55,000. A broker offers three policies: fire and building cover at B$3,600 a year; public liability at B$2,400 a year; and commercial vehicle cover at B$1,800 a year. The owner is considering insuring only the building, since 'the landlord owns it anyway', and skipping the rest to save B$4,200. Last year a delivery driver injured a pedestrian's foot, and a freezer failure spoiled B$2,000 of stock.
1. Advise the owner on which risks to insure, which to retain, and why. Use the idea of insurable interest and the size of potential loss.
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Insurable interest. The owner has an insurable interest in the contents (ovens, stock, van) and in legal liabilities arising from the business, because a loss would fall financially on the business. The owner does not have an insurable interest in the building itself if the lease makes the landlord responsible for the structure; insuring it would be wasted premium unless the lease says otherwise. This must be checked before paying B$3,600.
Risks to insure.
- Public liability (B$2,400): a pedestrian injury already happened last year. A serious claim could exceed B$12,000 of savings many times over. This is a low-frequency, high-severity risk and should be insured.
- Contents and stock: B$55,000 of equipment and stock against B$12,000 of savings. Fire or theft would be unaffordable, so insure the contents.
- Van (B$1,800): third-party liability for vehicles is normally compulsory, and B$28,000 is beyond the owner's reserves.
Risks to retain. A B$2,000 freezer spoilage loss is small relative to B$55,000 profit. The owner should retain it through precautions (temperature alarms, backup power) rather than pay a premium and excess for a minor, frequent loss.
Conclusion. Buy public liability, contents and vehicle cover; verify the lease before insuring the building; retain small spoilage risk with loss-prevention measures.
2. Explain what happens if the owner under-insures the contents and a fire causes B$30,000 of damage.
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If the contents are insured for less than their full value, the principle of indemnity applies and many policies include average (under-insurance) clauses. Suppose the ovens and stock worth B$55,000 are insured for only B$27,500 - 50% of value. A B$30,000 loss would then be settled at 50%, i.e. B$15,000, less any excess. The owner bears the remaining B$15,000, which exceeds the B$12,000 of savings.
The insured also cannot profit from a loss: indemnity restores the owner to the pre-loss financial position, not better. Replacement-cost cover may pay more than market value but still requires accurate sums insured. The practical lesson is to review the sum insured annually as equipment and stock values change, and to disclose all material facts so the insurer cannot reduce or refuse the claim.