When a business owner renews an insurance policy, a lower premium usually sounds like good news. But Dustin Carlson warns that the number on the invoice tells only part of the story. Coverage can narrow even as prices fall, leaving companies exposed to losses they assumed their insurance would handle.
Carlson is president of SRA 831(b) Admin, an Idaho-based company that helps businesses establish and administer certain self-insurance arrangements under Section 831(b) of the tax code. In his conversation with John Boitnott on Beyond the Bank, he explains why understanding what insurance excludes has become as important as understanding what it covers.
His argument begins with a familiar problem: businesses often discover their largest coverage gaps at precisely the moment they can least afford them.
The Risks That Traditional Insurance Leaves Behind
Carlson points to the COVID-19 shutdowns as an example of how expectations and policy language can diverge.
Many companies experienced severe interruptions when government restrictions prevented them from operating normally. Yet traditional business interruption policies often required physical property damage to trigger coverage. Businesses without that damage could find themselves responsible for the losses.
According to Carlson, some SRA clients were able to draw on their separate self-insurance arrangements to help maintain cash flow during the disruption.
He sees similar vulnerabilities in less dramatic circumstances.
A company may depend on a software provider for customer management, payments, or daily operations. If that provider experiences an outage, the resulting disruption can affect the business even though nothing has happened to its own equipment.
Carlson cites SRA’s reliance on Salesforce to illustrate the exposure. A failure at an outside technology company can quickly become an operational problem for its customers.
Other examples include supply chain interruptions, reputational damage, litigation expenses, and losses involving cyber fraud.
These risks are easy to overlook because they do not always resemble the fires, accidents, and property damage that business owners traditionally associate with insurance.
AI Is Creating New Questions About Liability
Artificial intelligence is adding another layer of uncertainty.
Carlson describes how generative AI has made fraudulent emails more convincing. Messages requesting updated banking instructions may no longer contain the spelling mistakes and awkward language that previously helped employees recognize scams.
A company that transfers money without independently verifying those instructions can suffer a significant loss.
AI also creates potential liabilities when businesses use automated systems to produce contracts, communicate with customers, or make decisions.
Carlson says insurers have begun introducing policy endorsements addressing AI-related liability, including exclusions that businesses should examine carefully. The precise effect depends on the wording of an individual policy.
His concern is that companies may adopt AI tools without considering who is responsible when those tools make mistakes.
Insurers face uncertainty as well. Emerging technologies may not have the historical claims data needed to price coverage confidently, making some carriers reluctant to accept the risk.
For business owners, the immediate lesson is practical. AI adoption should be accompanied by verification procedures, human oversight, and a careful review of insurance terms.
What an 831(b) Arrangement Actually Requires
SRA’s work centers on helping eligible businesses manage certain risks through their own insurance companies.
Under Section 831(b), qualifying insurance companies may elect special federal tax treatment. Carlson describes the arrangements as a way for business owners to establish reserves for covered losses that conventional insurance may leave unaddressed.
He emphasizes that the primary purpose must be insurance, with tax treatment serving as an incentive rather than the reason for establishing the arrangement.
That distinction matters because Section 831(b) arrangements have faced substantial IRS scrutiny.
Carlson acknowledges that some structures were historically used for estate-planning purposes that did not reflect legitimate insurance activity. He argues that properly administered arrangements must satisfy fundamental insurance requirements.
Those include genuine risk transfer, appropriate risk distribution, coverage of insurable risks, and operating practices consistent with an actual insurance company.
A business cannot simply treat its insurance entity as a savings account available for unrelated investments or personal spending.
Premiums must be collected, policies issued, claims evaluated, and covered losses handled through documented procedures. Ordinary, predictable operating expenses generally cannot be converted into insurance claims merely because a business would prefer to reserve money for them.
Carlson says SRA focuses on administering these requirements and helping clients understand which risks may be appropriate to insure.
He also notes that the economics are not suitable for every organization. SRA generally looks for businesses with at least $2 million in annual gross revenue, although suitability depends on the business and its circumstances.
Read the Exclusions Before the Crisis
Carlson’s strongest recommendation applies whether or not a company considers an 831(b) arrangement.
Business owners should review their existing insurance policies, especially the exclusions, and ask their agents which plausible losses would remain uncovered.
That review should extend beyond traditional property risks to include cybersecurity, third-party service failures, and the consequences of using AI in business operations.
Carlson also recommends basic preventive measures such as employee training, payment verification procedures, and cyber incident response planning.
These steps may prevent certain losses altogether, reducing the need to rely on insurance afterward.
Self-insurance requires additional scrutiny. Because its legal, actuarial, regulatory, and tax requirements are complex, businesses considering Section 831(b) should obtain independent advice from qualified insurance and tax professionals rather than relying solely on projected tax advantages.
Carlson’s broader point is that protecting a business requires preparation before a crisis arrives. Owners spend years building companies, developing relationships, and generating revenue, but the risks capable of disrupting that work can remain largely invisible.
Understanding those exposures is the first step toward deciding which ones to prevent, which ones to transfer, and which ones the business must be financially prepared to bear.
Want more Beyond the Bank? Read more articles or listen to the episodes on Apple Podcasts.
