Insurance is one of those things that small business owners know that they have to have, but it doesn’t help generate any revenue, so it’s not a sexy topic. It’s typically not going to be something that’s discussed over a coffee shop table, or a to-do list item that ever makes it to the top. Rather, it’s usually one of those ‘I need to do this’ kind of items, ones that get pushed down until you actually have to worry about them.
Everyone knows they have to have insurance, it’s just a case of having what you need and, more importantly, not getting taken to the cleaners when you rock up to a broker or a provider.
Where things get a little tricky is when the lines between a business and the home get a little blurry – such as a startup being run from the garage. You may have the greatest business idea since build-your-own furniture, but you still need to be a little savvy when it comes to protecting the empire you’re scratching out.
Geoff Golding, founder of YourBusinessMentor, who worked in the insurance business for 30 years before starting his own business, believes that one of the most common mistakes people make is not differentiating themselves from the business – particularly for home-based businesses.
“The best thing to do is to have a separate policy in the name of the business, not in the name of the homeowner – for the risks associated with the business,” he explains. “For example, we have an office within the apartment and we have home-and-contents insurance. But we have our own separate public liability insurance, and fire insurance, etc.”
Golding points out that some business owners see that as duplication. Why insure something that’s already covered? But by doing it this way you can fold some of your insurance expenses into your tax claim.
“For instance, you have a laptop, you use it between nine-to-five, but on the weekends, the kids borrow it to do their homework, so you have this crossover situation. You’re better off keeping it in the name of the business because you’ve got the tax deduction for insurance that you wouldn’t get there otherwise.”
Another common mistake Golding has seen is people ignoring the risks and saying ‘oh, it will never happen to me.’ While you can easily go overboard and insure the business for things it doesn’t need, there are obvious ones that should be explored.
“I have a friend who has a motor repair business out near Richmond, and before Christmas we were out there and we were talking – just on a social level – about his business, and next door there is a creek going down parallel with the side fence,” recalls Golding. “I said to him ‘John, do you have flood insurance?’
“He said ‘I don’t think I have,’ so I said when your insurance broker comes down in a couple of weeks time, you better get him to put it on for you.”
Stories like this are going to be commonplace with the volume of water lashing the eastern states of Australia right now, but by the same token, who could have predicted a 100-year flood event? The best practice is to take out cover for risks that make sense, such as fire protection, business interruption, business expenses, and income protection.
The insurance needs of every small business are going to be slightly different, and there’s no magic formula of what you do and don’t need. But you can arm yourself with a little knowledge by doing some research and making sure you are speaking to the right people.
Warren Turner, SME package specialist at Suncorp, explains that people really need to know the difference between a broker and an agent.
“The only people that operate on commission are brokers, who derive commission from insurance companies,” he explains. “An agent works for the insurance company and does not charge a commission.”
Turner believes that small business owners should start small, and identify any risks or possible exposures that may impact the ability to trade as a business. Once you have identified those, then the next step would be to ask what insurance cover there is that can fully protect you.
Where people tend to get a little wary with insurance is with brokers and commission. The advantage a broker provides is they will assess the various policies available on the market from a wide variety of providers. For that ability, the broker will charge you a commission on the policy. On the other side, by dealing with providers directly, you are able to package the various options you need and get a good price by doing so, but they are not going to offer you packages from the competition.
James Stephen, founder of financial planning firm Stephen and Partners and a part-time tutor at Monash University, believes that the best place to start is by asking around and getting feedback on who the right person to speak to is.
“Most people will just take the commission and then say ‘see-you-later,’ and then off they go to the next person – they just build up that commission book over time,” he says.
“You may already have a financial planner who will be able to help you with this, so you are already there,” adds Stephen.
“Alternatively you can ask your accountant, who will generally have some sort of relationship with an [insurance provider or broker], or a fee-only type financial planner. You can also ask your lawyer or a broker if you have a good contact, or even a fellow small business owner.”
Stephen warns that you still need to follow that up with some research, as quite often people will ask another business owner that has been through the same thing, but they won’t know if they’ve been ripped off. He points out that they might have thought that the person was nice and did a good job – but how do they really know?
If you do decide to go the broker route, YourBusinessMentor’s Golding believes you shouldn’t just rely on a referral. When you sit down with the broker, he believes you should see what deals he or she comes up with, and then ask questions as to why it’s the best deal for you.
“The insurance broker should get a number of quotations from different insurers,” he says. “All too often, over the years, I’ve seen it where somebody goes to a broker and he comes back and says ‘here is the deal, take it or leave it’ and that’s it. When they get asked how many insurers they spoke with, they start squirming in their chair.”
It’s the same with commission, as these days it’s a well-known thing. You should be able to ask your insurance broker how much commission they are charging you, and if they are not comfortable telling you or try to be vague, then you know that you should deal with someone else.
Like most things in small business, it’s about putting in the time and
effort to do a little bit of research before you sign on the dotted line ‘just because you need it’. There are advantages to going with a broker, but there is also the risk of getting
ripped off, and no matter what you will end up paying them commission.
Similarly, providers are going to be more honest about the charges, and offer good package deals, but the downside is they won’t assess what’s out there amongst the competition, and will naturally only offer you services from their stable.
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