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When It All Goes Horribly Wrong…

There are rather a lot of businesses whose main insurance policy involves crossing their fingers and hoping nothing goes wrong. As Fran Molloy explains, investing in the right cover for your business now can make all the difference when disaster strikes.

Business owners across Australia received a warning when natural disasters whipped across the country earlier this year. Wayne Kayler-Thomson, who heads the Victorian Chamber of Commerce, issued a press release stating that business losses from the February 2009 Victorian bushfires were likely to be in the billions of dollars.

He says that at least 60 businesses were destroyed in the fires and an estimated 7000 ABN-registered businesses in the fire-affected areas were hurt.

Meanwhile, in Queensland, flooding between December and February left an estimated 62% of the state underwater, with early estimates putting the damage bill at around $ 100 million.

A December 2008 report by the Insurance Council of Australia found that more than a quarter of all small to medium-sized enterprises in Australia do not have any general insurance, while a whopping 40% of all sole traders have no general insurance.

The report found that the cost of insurance was the biggest barrier for most small to medium-sized enterprises without adequate insurance.

But while many business owners looking to cut costs find it difficult to see value in rising insurance premiums that don’t deliver a tangible benefit, cutting corners on insurance may be tempting fate.

Nothing to lose?

“You should only buy cheap insurance when you’ve got nothing to lose,” says insurance broker Peter Johnson, of Genesis brokers in southern Queensland.

Johnson, who has been in the industry for 28 years, says that a good insurance broker gets a real feel for his client’s business when he stops asking about the value of stock and equipment and starts asking what might happen if they couldn’t trade for two, four or six weeks because of a loss.

“Most businesses have a good feel for the value of their stock and their capital,” he says. “If you want to take a calculated risk, these are actually the things it might be worth taking a gamble with.”

For example, he suggests that a business might choose not to take out a policy that covers a laptop, instead ‘self-insuring by being prepared to meet the loss if it happens, and reducing their risk by making sure that they regularly back up the data and store it securely off-site or online.

If you know that the cost might be limited to a few thousand dollars, perhaps you’re willing to wear the risk of the cost of the rain-damaged product, or losing a little stock to shoplifters. But you don’t want to leave yourself open to a blank-cheque risk.

“It is the things you really can’t put a number on that can multiply your risk. If you injure a third party through negligence, no one knows what the legal costs and ongoing costs might be, it could be enormous.”

Johnson says that public liability cover and product liability cover are essential to most businesses; and for any self-employed person, income protection insurance is also a must.

“It’s something that self-employed people tend to overlook, but it really is the most important part of their business. If you want to be the master of your destiny, you have to protect your ability to master your destiny.”

Navigating the maze of business covers

More than 80% of small to medium enterprises in Australia arrange their insurance cover through a broker, says Mike Donnelly, who heads South Australian brokerage firm Donnellys.

Ensuring small business is never a one-size-fits-all proposition, says Donnelly. His company offers a free web-based ‘Small Business Insurance Finder’ that suggests the ‘essential’ versus ‘optional’ insurance cover likely to suit different types of small businesses.

Home-based businesses will often start out by extending their general home insurance policy to cover some of their home business – but while the home office might be partially covered by some insurers, Donnelly warns that it’s rarely enough.

“Some home policies will provide limited cover for business equipment and possibly stock while it’s on the premises,” he says. “But there’s no cover away from the premises and, in particular, there is no public liability cover at or away from the premises.”

Never assume that any general home and contents policy will cover your small business, he says. It’s really important to contact your insurer and at least tell them you have a business at home and find out what impact that has on your policy so that you are not risking your personal insurance policy through non-disclosure.

He says that a number of insurers now offer a fairly comprehensive range of business covers that can be written under a ‘Business Insurance Package’.

“This reduces the premium cost compared with having a range of individual policies,” he says, adding that insurers are finally producing insurance packages that target different small-business niche groups, such as trades, retailers, or professional services businesses.

The traps hidden in fine print

Donnelly warns that even niche insurance products can slip in some ‘fine print’ traps, such as a ‘co-insurance clause, removed from many home insurance policies after pressure from consumer groups.

Co-insurance requires you to insure for the property’s full replacement value – and if you are under-insured, payout on any claim is reduced in proportion to the amount of the under-insurance. These clauses can prove quite a trap for business, as they require constant monitoring of the values of the property insured.

Should you use an insurance broker?

Insurance is a complex and rapidly changing industry, so it makes sense to engage an expert to guide you.

While the majority of personal, home, and car insurance is arranged directly with insurance companies, most businesses engage a broker to arrange insurance.

While under-insuring can be devastating, over-insuring can waste a significant amount of money, particularly if it continues for a long time. Johnson says that insurance brokers take a commission portion of the premium that clients pay to insurance companies, but most good brokers also add a broker fee.

However, if your broker is doing a decent job, you are likely to save a substantial amount because you will only pay a premium that covers insurance applicable to your business.

Choosing the best combination often involves multiple policies and insurers, and claiming can become complex.

“If you are using a broker, in the event of a claim, they are your intermediary, and they are acting on your behalf as your agent, not as an agent of the insurance company,” says Johnson.

And with around 40% of sole traders uninsured, the recent disasters in Queensland and Victoria bring a bitter reminder to all of us that insurance may not just mean peace of mind, it may mean the future of your business. # 

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