Small business ignores the insurance imperative
Monday, 15 October 2007
Last Updated: Wednesday, 17 October 2007
By James Dunn
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:
- Liability – legal obligations arising from injury to others or damage to their property.
- Assets and revenue – things the business owns and its revenue-generating capabilities.
- 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.
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.
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