Accidents happen all the time and when an accident happens causing damage or destruction to property or equipment there is a cost to repair or replace the damaged/destroyed property. Likewise, when an accident takes place causing bodily injury to others, there are costs that are very likely to be faced by the party who caused the accident.
Financing the cost of the accident can be easy if we have sufficient money of our own to pay for the damage or injury or if we are able to borrow the money from a financial institution, or elsewhere, but it can be devastating when we do not have sufficient money reserves or borrowing power.
Virtually all business, industry and individuals have an alternative manner in which they can finance the cost of risk.
They can transfer many types of risks through instruments most often referred to as insurance policies (which are contracts of indemnity).
Contracts of insurance (indemnity) with insurance companies are legal, binding written agreements that provide a measure of indemnification when an insured accident causing financial loss takes place, and unlike the unknown costs of an accident, the cost of transferring the cost through is known before the accident happens. It is the insurance premium cost.
Financing the cost of accidental losses can be managed through three basic choices: