For a small business, unexpected events or disruptions can significantly impact operations, leading to a serious dent in sales and cash flow or forcing owners to close their doors all together.
For all the planning and preparation involved in starting a business, many small and medium enterprises (SMEs) fail to take out an adequate level of insurance cover. A decision prompted by the need to save time and money in the short term, or simple complacency, can result in devastating consequences for business owners when they find their insurance cover is inadequate. Insurance advisers need to help steer customers away from falling into the underinsurance trap. In doing so we’ll not only prepare them for the unexpected but also protect their investment and livelihood.
Encourage business owners to ask themselves if they are ignoring potential risks to their business just to save money, thinking “it won’t happen to me”. When the unthinkable happens, such as a burglary, car accident, machinery breakdown or even a tax investigation, it can cost many thousands of dollars for the sake of saving a few hundred.
1 Ensure cover reflects the true replacement value of stock, equipment and buildings
This is one of the most common ways businesses get into trouble after an event such as a fire or storm. Business owners might choose to insure only a percentage of the replacement value to cut premium costs. However, they are also electing to take on a percentage of the risk. A fire caused by an electrical fault, for example, can cause total loss for a business, leading to significant costs and months of rebuilding.
Another pitfall is neglecting to review the insured sum at renewal time or when changes happen to the business. For example, growing businesses may expand premises, buy new equipment or diversify products. When the time comes to make a claim, the sum insured no longer reflects the true replacement value of their business assets. A business’s insurance policy needs to grow with the business.
2 Set a sufficient indemnity period for business interruption cover
Many SMEs admit that an unforeseen business disruption would have a severe impact on their business, yet only a portion of them had business interruption insurance. Of those that had the cover, it’s likely the agreed indemnity period is not long enough.
Planning permits and regulations can sometimes add months to rebuilding timeframes, and the time to obtain replacement equipment from the likes of overseas suppliers can also be far longer than first thought, so it’s important to consider this when arranging cover.
3 Thoroughly assess the business and its potential risks
Of those SMEs that did feel 100% confident they had the appropriate cover for their needs, significant shortfalls were found. Many did not have insurance cover for business interruption, employee dishonesty, tax audit, and directors and officers liability.
It’s also common for small-business owners to arrange insurance only for compulsory cover. This applies particularly to tradesmen and those who work on the premises of others, and to businesses starting up and needing to finance. A small-business owner may only purchase liability insurance, for example, but there are many other risks to the business that they need to consider.
4 For clients leasing premises, be mindful of what isn’t covered by the property owner
Property owners often require tenants to insure certain elements of a building, such as plate glass windows or even the building itself, on the tenant’s own policy. In the event of a fire, broken windows by vandals or a burglary, a business owner may find they are not covered but are responsible for repairs under the lease.
5 Highlight the importance of continuity of liability cover
Many smaller businesses and sole traders cancel their liability insurance while on leave or when they’re between contracts, to reduce premiums. As a result, they often neglect to reactivate their policies when they’re back on the job. Liability cases can end up in court and run for two to five years, leading to hundreds of thousands of dollars in legal fees. Business owners can be left paying these fees to defend their reputation.
