The increased cost of construction brought on by the carbon tax and the soft economic conditions mean many more small businesses are taking the risk of being underinsured, an insurance consultant warns.
The managing director of loss adjuster LMI Group, Allan Manning, says many businesses are already underinsured and few realise they will be forced to dip into their own pockets when they make a claim.
For instance, if a business owns a building worth $2 million but has it insured for just $1 million, then the insurer will cover only 50 per cent of losses, with a small tolerance for errors. If a fire caused $250,000 damage to the building, the insurance company would pay out just $125,000, leaving the business owner to make up nearly $100,000.
Manning says most businesses do not realise they are not fully covered for their losses until they make a claim.
”I get these two looks when I explain it to people: first, a look of understanding, then a look of horror, because they realise how much it’s going to hurt them,” he says.
The Insurance Council of Australia points out that insurers are under no obligation to replace an underinsured asset. It encourages businesses to regularly check their policies and assets to ensure they are adequately covered.
”Business owners do not appreciate they are underinsured until they make a claim and find the amount for which they are insured may be less than the market value or the replacement value of the asset,” says the general manager of communications at the ICA, Campbell Fuller.
”Business owners should review the value of assets at least once a year or when the business expands or acquires new assets, to ensure the sum insured matches the value of the business.”
Manning says many businesses often fail to increase their insurance levels as the replacement costs of their stock, equipment and buildings rise. Indeed, nearly half of Australian businesses have not increased their insurance coverage in the past three years, suggesting many are not keeping up with rising costs.
The increased cost of energy, manufacturing and waste management resulting from the carbon tax to come into force this year will increase the replacement cost of buildings and exacerbate Australia’s underinsurance problem, he says.
Second, a lot of businesses struggling with the two-speed economy have decided to try to save money by scrimping on their insurance premiums, a risk Manning says is foolish given how important small businesses are to their owners.
”It’s really their life’s work: it’s their sole source of income, it’s their largest if not sole investment and it’s their superannuation,” he says.
”We’ve got a perfect storm coming over the next 12 months.”
[Extract from Herald Sun article by Christopher Niesche, May 09, 2012]