Basics of insurance

• 13 November 2007
• Page 1 of 2 : single page

Insurance can protect against catastrophes like this as well as other disasters and accidents. Insurance is a major cost for many small businesses, but careful planning and taking the time to look round for the suitable policy can cut this cost.

The most useful insurance for a small business will usually cover the following areas:

Fire, storm and tempest, explosion, earthquake damage, other consequential loss, public liability, personal accident and illness, damage to motor vehicle, burglary, machinery breakdown, glass breakage, loss of money, loss of profits etc.

Similarly, if you, or a key person in the business (e.g. your spouse) became disabled or died, your family would face real financial hardship.

Insurance can protect against catastrophes like these, as well as other disasters and accidents.

Planning - Insurance

Small business can sometimes be risky business, particularly in today's competitive business climate. As a small business owner you will have to be prepared to take risks, but there are things that you can do to minimise those risks and maximise your chance of success.

Taking out comprehensive insurance to reduce your risk is an important part of the planning exercise. Being uninsured, underinsured, or having the wrong kind of insurance can close your business down if you have a fire or a staff or customer injury, or personal illness.

The right insurance will keep these losses to a minimum and safeguard your business operation. The benefits of insurance include: reduced worry, reduced employee turnover, a product that is easier to sell and credit that is easier to obtain.

So what type of insurance is required for your business?

The following is a short checklist you can look over and then get a more extensive explanation in the section on "Types of Insurance".

You will need:

• Fire insurance - to protect your principal assets including buildings, contents and stock.
• Business interruption insurance - to cover loss of profits and ongoing staff costs, and operation costs that may be necessary in the case of disaster such as a fire.
• Public liability insurance - to cover your potential liabilities to third parties where there is injury or damage to property, or to person, because of your negligence.
• Employees liability insurance - to cover Workers' Compensation (Work Cover), which is compulsory for all businesses that employ staff.
• Burglary - which will cover theft from locked premises.
• Money in transit - where money is moved from business premises to another area or to the bank.
• Fidelity guarantee insurance - for fraud or dishonesty committed by employees.
• Glass - breakage of fixed external or internal glass.
• Product liability insurance - where the use of your product causes harm or loss.
• Professional indemnity insurance - for negligent acts or errors and omissions when providing professional advice, etc.
• Other insurances that cover electrical breakdown, general property, marine, construction risks, motor vehicles, directors and officer's liability and employment practices liability.

Basic decisions to make

How much insurance you should buy is not entirely up to you in many cases. Worker's Compensation (Work Cover) which is a form of insurance and motor vehicle third party insurance are compulsory. In addition, when raising finance and purchasing assets on hire purchase etc the other party generally requires insurance cover to be taken out by you to protect their interest.

The options available to you are:

a) Self-insurance. Many small businesses opt to self insure (ie. To bear some or all of the risk themselves). Three ways of doing this are:

i) Not to buy any insurance at all.
ii) To insure for less than the total value of the asset.
iii) To agree to bear all the claims up to a fixed sum yourself.

b) Insurance with a company. For most small businesses self-insurance is not practical since even small losses at the wrong time can make the difference between success and failure. Most businesses should insure as comprehensively as they can afford through an insurer. Basically there are two ways of doing this:

i) Dealing direct with a company or its agents.
ii) Dealing through an insurance broker.

Either way the first step is to find out about the reputation of the company or the broker you deal with and then make a decision of who to approach.

Self-Insurance

One option is to self-insure (i.e. bear some or all of the risk yourself). There are three ways of doing this:

1. Do not buy any insurance at all.
2. Insure for less than the total value of the asset.
3. Agree to bear all the claims up to a fixed sum yourself.

No insurance means not insuring at all against any risks. You choose to bear any losses from your own savings or from the business working capital if a particular event occurs.

People who forget to insure or do not consider the danger until after it has happened are making the same choice though they may not be aware of it. It is unwise not to insure, particularly if you do not have a large working capital reserve.

Insurance for a lesser value is about insuring only a portion of the value of your assets. Many insurance policies require full insurance, but some give a choice of insuring for a lesser sum. This means you must bear all of the losses over a certain figure from your own resources.

Self-insurance for a lesser value tends to be a pretty bad deal. It may be justified in some circumstances (e.g. someone who can replace assets through family or business contacts), but generally speaking, it is not recommended.

Self-insurance up to a fixed sum is where an insurance policy contains clauses that make you pay the first say - $1,000.00 of any claim after which the insurance company will cover the balance. To reduce your premiums, you can arrange with some insurance companies to pay a part of the claim yourself so that you meet the first part of the claim and they cover the balance. Sometimes this is called "excess". In effect, the greater your excess or liability, the lesser your premium.

How Much To Insure For

If the worst happened how much would it cost to replace the assets or the person insured? Many small businesses risk financial disaster through under-insurance. Although some firms knowingly underinsure, others often misunderstand the terms of their contract and do not realise just how small the payouts from those policies would be or do not know the real replacement value of the assets being insured.

Over-insurance as well, is almost as bad as under-insurance. When you insure for a larger sum than is necessary (e.g. When you cover the same risks twice under a different policy) then you are wasting money and in the event of a claim you will not recover more than you have lost.