As the owner of a lawn maintenance or landscaping business, you constantly make decisions involving risk. For this article, the term ‘risk’ is defined as uncertainty about outcomes that can be either negative or positive. When you made the decision to start your business, you calculated the risk involved in it. Risk is present in all activities, yet people and organizations are often unaware of risk or the significance of the financial consequences associated with accidental losses. I am sure that when you started your business, that you overlooked or were unaware of many of the risks you would face. As you begin to realize these risks, you also realize the greater importance of risk management. Risk management consists of both controlling risks and financing risks. I will introduce the topic of Risk Control in another article, but right now I want to focus on the subject of financing risks.

Risk Financing has traditionally been dividing into two types of techniques, which are retention and transfer. Retention is a risk financing technique by which losses and variability in cash flows are financed by generating funds within the organization. Transfer is a risk financing technique by which the financial responsibility for losses and variability in cash flows is shifted to another party. Most risk financing measures available are actually combinations of both retention and transfer. Therefore, a major part of the risk financing decision for every loss exposure involves determining the most appropriate retention levels. Once a level of retention has been decided, there are many transfer measures available, some of which are more suited to particular types of loss exposures than others. The most common transfer measures are obtained through purchasing insurance policies.

Before we get into the purpose of purchasing insurance policies, I would first like to touch on the major goals of risk financing. These goals must align with an organization’s overall goal to maximize value for the stockholders or the business owner. The goals of risk financing are to have enough funds to pay for losses, to manage the cost of risk, to manage cash flow availability, to maintain an appropriate level of liquidity, and to comply with legal requirements. Risk transfer through insurance helps landscaping businesses obtain many of these goals and the types of insurance that the organization needs to purchase changes as the organization grows and as their risk exposures change.

The purpose of purchasing insurance aligns with the landscaper’s overall business goals and risk management goals and insurance policies are purchased to strive towards those goals. The purpose of purchasing insurance is to gain the advantages of transferring risk. These advantages are:

• 1. Reducing exposure to large losses – This is the principle advantage of purchasing insurance. Retaining large loss exposures increases the probability that the landscaping business will incur financial distress. Financial distress can have negative effects on relationships with suppliers and customers and may ultimately lead to bankruptcy.
• 2. Reducing cash flow variability – By reducing the effect of losses associated with retaining large loss exposures, insurance helps lessen the variability of cash flows. An annual premium cost is more predictable than the exposure of large losses. More predictable cash flows makes a landscaping business a more reliability source of income for its owners and more attractive to investors, thereby potentially increasing the overall value of the business.
• 3. Gaining ancillary services with the insurance – Insurers often offer risk assessment and control services as well as claims administration and litigation services. The level of efficiency and expertise that some insurance carriers have developed in these areas often makes the risk transfer agreement very appealing to landscaping businesses that cannot provide these services efficiently. Although it is possible to obtain these ancillary services outside of transfer agreements through third-party providers, this can be expensive.
• 4. Avoiding adverse employee and public relations – By purchasing insurance and thus transferring responsibility for losses to the insurance carrier, the landscaping business also transfers responsibility for the claims administration process. Therefore, any issues with claims administration are less likely to harm the reputation of the business and consequently are less likely to generate adverse employee and public relations.

The Agent Articles section of BearWiseLandscapers.com allows our insurance agents to provide practical information for landscapers. These agents can also obtain quotes and establish a custom insurance program for your landscaping business through our access to a variety of insurance carriers. This agent article is filed under (1) Insurance, and you can follow comments to it through the RSS 2.0 feed. Feel free to leave your own response below: