Small business ignores the insurance imperative

Once you have set up your business, why would you want to risk losing it all? In many cases, a simple insurance plan is all you need. By JAMES DUNN.

By James Dunn

A lack of attention to insurance could be the Achilles heel of Australia’s 1.66 million small business owners. According to the Insurance Council of Australia (ICA), one in six small businesses – more than 270,000 businesses – are not insured.

Many SMEs have insurance, but are under-insured. Commercial insurer CGU says 65% of small businesses have no business interruption cover, 47% do not adequately insure their stock and contents, and 82% of businesses that own buildings do not insure them appropriately.

The Australian Bureau of Statistics (ABS) says that one in six home businesses – of which there are 800,000 in Australia – are either under-insured or not insured at all.

It is small wonder that the reliance by home business operators on their home and contents insurance policy is considered the industry’s “black hole”.

“It’s an alarmingly common misconception that a home-based business’s risk is covered by a standard residential home and contents insurance policy,” says Mike Hooton, marketing and operations director at general insurance group Calliden.

“In most cases, this is not true, leaving business owners at risk of losing not only their business but their home as well,” says Hooton.

Small business insurance falls into three basic categories:

1. Liability – legal obligations arising from injury to others or damage to their property.
2. Assets and revenue – things the business owns and its revenue-generating capabilities.
3. Personnel – protection against loss arising from personal accident or illness involving the owner of the business, or its employees.

A business’s priority should be the compulsory insurance that is required, particularly if the business is employing people, such as workers’ compensation insurance and compulsory third party (CTP) motor insurance.

Public liability should really be seen as a pre-requisite for setting up any business, certainly if it is hiring or leasing premises. Professional insurance is only relevant for small businesses that are giving professional advice.

Next, a small business should think about protecting its assets – and its revenue. Fire and perils insurance and burglary insurance protects the assets, but business owners must give the same attention to the revenue.

Nicholas Scofield, general manager of corporate affairs at Allianz Australia, says business interruption insurance, which protects the revenue from damage to the property that generates it, is a must.

“Many businesses fail to recover from a major event such as fire, storm or earthquake, because overheads such as wages, loan repayments and rent continue, and key customer accounts need to be managed, even though the business may be unable to trade,” he says.

Scofield says more than half of businesses that suffer a physical loss and that do not have business interruption cover will not resume their normal business operations. But in a classic case of false economy, the ICA estimates that 42% of small businesses do not take out business interruption insurance. Hooton believes this figure is closer to 60% to 70%.

“Either they don’t think it’s going to happen to them, or in the economics of setting up a new business, it is not seen as a particularly important expense. They don’t see the consequences of damage and the physical loss to the asset itself. Business interruption insurance is like income protection, but for a business. It’s prudent to have some form of income coming in, to get the business back on its feet quickly, or to replenish the income you’re going to lose.”

Next comes the insurance that relates to personnel. In many cases, much of the business’s intellectual property is carried inside the owner’s head – so “key person” insurance is critical. The cover can be restricted to personal accident, or it can be extended to include full income protection, which would cover the key person for accidents, sickness etc, and is a much broader cover.

Some businesses will want to look at business expenses insurance, possibly as an adjunct to income protection. If the business stops operating, the owner’s income might be covered by income protection, but if the ongoing expenses of the business – for example office rent, business mortgage or loan repayments, equipment leasing costs and utilities payments – aren’t covered, the owner might need to use the income protection proceeds to pay those, to keep the business out of bankruptcy.

Ideally, a business owner would have the business’s net profit covered by income protection, any loans covered by term insurance – possibly with some total and permanent disability (TPD) cover – and the expenses covered by business expenses insurance.

Scofield says an adequate insurance plan involves thinking not only about the major categories, but some of the more specific cover needs, for example theft or fraud; breakdown of machinery, in particular information technology and communications equipment; loss of or damage to money being handled by the business; the risk of loss or damage while transporting goods or property to or from the business’ premises. Allianz Australia has produced a checklist, which can be seen in below.

Lastly, even if a small business thinks it has adequate insurance in all of these categories, insurance should never be considered a set-and-forget investment. Small businesses need to make sure that their insurance cover keeps pace with growth in their business – and inflation.

CHECKLIST: What insurance coverage do I need?

There are many different types of insurance that are designed to cover your business needs, which can be grouped into four main areas:

• Employers liability or Workers’ Compensation
• Property/assets insurance
• Public/product/professional liability insurance
• Car insurance

Employers’ liability or Workers’ Compensation

Workers’ Compensation insurance is a mandatory requirement for all businesses that employs staff on a casual, part-time or full-time basis. It provides cover for the financial costs of claims made by a staff member for work-related injuries, disease, illness or even death.

Property insurance

Property insurance covers the costs associated with the repair or replacement of your physical assets, including your building, equipment, furnishings, fixtures, inventory, computers, and business documents and records.

Examples of some coverages include:

Fire & perils insures against destruction or damage to your business, including building and contents, from a specified insured event, including fire, explosion, storm, earthquake or water damage.

Business interruption covers you if your business is interrupted due to damage to your premises, from an insured event, which affects the trading results of the business.

Burglary covers loss of business stock, contents, and machinery by theft following a forcible and violent entry into the business premises.

Engineering equipment or machinery breakdown insures you against the cost of breakdown of machinery, computers and electronic equipment owned and operated by your business.

Loss of money protects you against the loss of or damage to your business’ money from theft, armed hold-up or fire, either while the money is on your premises or in transit.

Goods in transit covers against loss or damage to your property whilst it is in transit. This is available for Australia only or worldwide, depending on your business needs.

Glass breakage covers accidental loss or damage to internal and external fixed glass including Perspex signs which you own or for which you are legally responsible.

Employee dishonesty (fidelity guarantee) protects you against fraudulent or dishonest conduct of employees acting alone or in collusion with others. This mainly relates to theft or misappropriation of money or other items owned by you by your employees.

Electronic equipment covers specified equipment such as computers, faxes and electronic cash registers against accidental loss or damage including theft and breakdown.

Comprehensive car insurance insures you against loss of or damage to your vehicles due to a collision and other accidental damage, theft, fire, and also includes indemnity for any legal liability for third party property damage.

Third party injury liability (Compulsory Third Party) protects your business from any legal liability arising out of an accident involving one of your vehicles that results in injury to another person.

Public/product/professional liability insurance

Public and product liability insurance and professional indemnity insurance protect the owners and operators of a business from their financial liability to third parties arising out of an event or occurrence that they are legally covered for during their operation.

Provided by Allianz Insurance.