“A necessary evil” and “a grudge purchase” are phrases I sometimes hear from business owners when describing their view on business insurance.
I usually find that those who form this opinion have opted to ignore the possibility that their business could face some type of peril, catastrophe or legal liability. On the other hand, some business owners are aware of their business threats but have a high-risk tolerance and the preparedness to self-insure for these events. If luck goes their way, this approach can be cost-effective over many years of premium savings. But before choosing this path, it is important that business owners are fully aware of their risks and comfortable with the potential ramifications.
Consider the risk and exposure(s)
Unfortunately with most underinsurance cases that I come across, the small businesses has not carefully considered the risks threatening their business or the insurance they have in place to protect it. Often I find that there are only minimal insurance arrangements in place, and a lot of the time these are only there to satisfy contractual requirements such as leases or customer contracts – not specific insurance protection designed for their actual business needs. I also find that if policies have been forced upon a business for contractual reasons, then price invariably becomes the sole objective at purchase time – not appropriate cover.
Seeking advice and guidance on business risk is an exercise well worthwhile for all business owners and operators. A good insurance broker will take the time to understand your business activities and point out the risks your company could face. They should also assist with providing you options on how you can best protect the business, whether it be through risk management and preventative measures or insurance.
If after the review and having considered all the options, you still elect to continue as you were – at least you have undertaken the exercise and are aware of what you are getting into. Nothing would be worse than suffering a major loss having never even considered the possibility of it occurring or protecting yourself from it.
Not all insurance policies are the same
When reviewing your insurance options, be aware that selecting an insurance policy based on price alone can be fraught with danger. As with most products and services, insurance policies are not all the same and sometimes pricing can be used as a guide on its quality.
If pricing varies greatly for insurance that you are considering, there may be a reason for this that is worth investigating.
Insurance companies sometimes have the ability to lower their pricing if they can reduce the cover they are offering through policy exclusions and sub-limits. If they can reduce their liability or exclude cover altogether in more commonly claimed sections of their insurance policy, it can allow them to reduce their pricing and on face value make their product look more appealing to a buyer.
Consider for instance a small business that has building insurance of $1,000,000 to cover a total rebuild in the event of a disaster. Their particular policy has a sub-limit for Removal of Debris of $25,000, which the insurer provides for the clean-up immediately after a loss and before re-building commences. Sometimes however there are complications associated with cleaning up sites. Hazardous materials, restricted site access or just the sheer volume of the clean-up can result in expenses spiralling well above this sub-limit. The insurer however now has an escape clause leaving the business owner with an unwelcome clean-up bill for any costs above $25,000. A good insurance broker will consider options that are appropriate for your business that reflect more accurately the cost of rebuilding your asset to mitigate against these types of short falls.
What insurance do you need for your business?
Most business owners are familiar with the more common insurances which protect their tangible assets such as buildings, contents, stock, and motor vehicles. But it is also incredibly important for small business to consider protection from some less obvious and more complicated risks which can be just as damaging.
Public Liability insurance is designed to cover businesses found liable for causing personal injury to people not employed by the business such as customers or damage to a third party’s property. Legal defence costs and claims in this space can be costly and lengthy. So it is important the policy you have suits your business activities and has cover that will respond appropriately so you can get on with running your business.
Business Interruption insurance is usually available in conjunction with most property insurance policies. Its purpose is to protect your profit and ongoing expenses for the period that your business is affected by a peril such as fire or flood. Often businesses are quick to insure their property assets but overlook protecting their loss of income which can be just as disastrous. This is especially the case if lengthy recovery and rebuild periods are involved.
In today’s litigious society, it is becoming more common for legal action to be taken against businesses for all kinds of professional services being delivered. Professional Indemnity policies can provide protection for your liability for financial losses which may be caused as a result of the service you have provided. Perhaps a project you are delivering may be delayed causing downtime or the performance of your service may not be as expected by the customer. Importantly, Professional Indemnity policies also designed to cover the legal costs to defend you even if you are not to be at fault.
Business owners also need to be aware of their exposures associated with the day to management of their businesses. Expensive legal defence and professional costs can come about if government regulatory bodies become involved in your business. This may be for compliance reasons, workplace health and safety matters or audit purposes. A good Management Liability policy not only includes Directors’ and Officers’ cover but also extends to protect the business from employee disputes and the possible theft of company money and assets by employees or contractors.
Cases of small businesses experiencing cyber hacking threats from both internal and external sources are rapidly increasing. Cyber-crime can cause lengthy downtime for businesses with ransom demands often involved. Companies can suddenly and unwittingly be in breach of privacy laws resulting in expensive remediation expenses and IT costs. Cyber insurance is now more than ever a critically important insurance for businesses to consider.