2.

BUSINESS RISK

DEFINITION OF RISK

RISKS- are simply future issues that can be avoided or mitigated, rather than present
problems that must be immediately addressed.

METHODS OF HANDLING RISK

There are 5 major methods of handling risk: avoidance, loss control, retention,
noninsurance transfers, and insurance.

• AVOIDANCE- is the elimination of risk. You can avoid the risk of a loss in
the stock market by not buying or shorting stocks; the risk of divorce, by not
marrying; the risk of having car trouble by not having a car. Of course, not all
risks can be avoided. Notable in this category is the risk of death.
• LOSS CONTROL- works by either loss prevention, which involves
reducing the probability of risk, or loss reduction, which minimizes the loss.
Losses can be prevented by identifying the factors that increase the likelihood
of a loss, then either eliminating the factor or minimizing its effect.
• RISK RETENTION- is handling the unavoidable or unavoided risk
internally, either because insurance cannot be purchased for the risk, because
it costs too much, or because it is much more cost-effective.
• NON-INSURANCE TRANSFERS- the 3 major forms of noninsurance risk
transfer is by contract, hedging, and, for business risks, by incorporating.
• INSURANCE- is another major method that most people, businesses, and
other organizations can use to transfer pure risks by paying a premium to an
insurance company in exchange for a payment of a possible large loss.

TYPES OF INSURANCE COVERAGES

• BUSINESS OWNER COVERAGE- Otherwise known as "catch-all"

coverage, business owner insurance provides damage mishaps. Owner
coverage also offers a degree of liability protection.
• PROPERTY INSURANCE- This can augment the property coverage offered
by business owner insurance. Property insurance covers damage to the
building that houses your business, as well to as items inside, such as furniture
and inventory.
• LIABILITY INSURANCE- In our litigation-looped society, this may be as
important a form of coverage as you can get. This covers damage to property
or injuries suffered by someone else for which you are held responsible. This
can take in a range of disasters, from the postal worker who sues you for a dog
bite incurred during a delivery to your home business, scorches himself after
you make your complimentary coffee just too darn hot.
• PRODUCT LIABILITY INSURANCE- You might want this form of
coverage if you make a product that could conceivably harm someone else.
For instance, catering businesses worried about some dicey-looking truffles or
Brie would do well to tack on this coverage.
 • ERRORS AND OMISSIONS INSURANCE- This coverage is particularly
important to service-based businesses, offering protection should you make a
mistake or neglect to do something that causes a customer or client some
harm. A good example is doctor's medical malpractice insurance, which
practicing physicians are required to carry.
• BUSINESS INCOME INSURANCE-This is disability coverage for your
business. This ensures you get paid if you lose income as a result of damage
that temporarily shuts down or limits your business.
• AUTOMOBILE INSURANCE- This last item should come as no great
surprise. If your business uses cars or trucks insome manner, you have to have
this type of insurance for collision and liability coverage.

FIRE INSURANCE

• is a form of property insurance which protects people from the costs incurred
by fires. When a structure is covered by fire insurance, the insurance policy
will pay out in the event that the structure is damaged or destroyed by fire.
Some standard property insurance policies include fire insurance in their
coverage, while in other cases, fire insurance may need to be purchased
separately.

GENERAL LIABILITY INSURANCE

• protects the assets of a business when it is sued for something it did (or didn't
do) to cause an injury or property damage. Insurance policy that covers claims
arising from an insured's liability due to damage or injury (caused by
negligence or acts of omission) during performance of his or her duties or
business.

SURETY BONDS

• is a promise to pay one party (the obligee) a certain amount if a second party
(the principal) fails to meet some obligation, such as fulfilling the terms of a
contract. The surety bond protects the obligee against losses resulting from the
principal's failure to meet the obligation.

3. BUSINESS FAILURE, REORGANIZATION AND LIQUIDATION

DEFINITION OF BUSINESS FAILURE

BUSINESS FAILURE- cosure or cessation of business activity that results in a loss

to its creditors. Firm that stops working due to lack of sales or profit, or retirement or
death of its principal without leaving any liabilities is not classified as a failure.

CAUSES OF FAILURE:
• Laying more emphasis on product, rather than market and marketing
• Laying more emphasis on company image.
• Getting into Undesirable or Bad Business Partnership.
• Attempting to have a very complex business model
• Attempting to pioneer a new product or industry
• Getting involved in a business lawsuit and bankruptcy
• Getting involved in messy Divorce Proceedings.