Insuring Your Business – Weighing Up the Cost of Risk

Running your own business can be rewarding, but there is also risk involved when you put your own money and reputation on the line. What would you do if your shop was destroyed by fire, a client sued over advice you gave, or your business was disrupted for months in the aftermath of a freak storm?

The financial loss to a small business from an unforeseen event can be devastating, which is why it pays to manage risk and protect your livelihood. Yet a surprising 19 per cent of Australian small to medium enterprises (SMEs) have no insurance, according to a recent QBE Business Risk Report.ⁱ

The main reason given for having no insurance, or inadequate insurance cover, is cost. But when your livelihood is a stake, can you afford not to be covered?

What are the risks?

There’s no one-size-fits-all insurance solution for small businesses. Before you purchase cover, you need to think about the potential risks you face and this will depend on the nature of your business.

For a restaurant, food poisoning is one potential hazard. The theft of tools or injury to a passer-by could prove costly for a builder, while a claim of professional negligence could do financial and reputational damage to an IT consultant. If that consultant works from home and a client trips and breaks a leg on the stairs, they could face a large claim for damages.

Most of the risks faced by small business fall into three broad categories: assets, income and liability.

Types of insurance

Asset protection

Common types of asset protection cover you for theft, loss or damage to buildings, contents, plant and equipment, motor vehicles and stock. You can also cover the loss or damage of goods in transit by rail, road, air and sea.

While most businesses have some level of asset protection, risks to income are often overlooked.

Income protection

Say you run a café and it’s destroyed by fire, you will lose profit on goods you have purchased for sale. Or if you are a solicitor and your office is damaged by flood, you won’t lose stock but you do stand to lose revenue from the loss of business until you repair the damage or find alternative premises.

The QBE report found that 43 per cent of businesses had no idea about business interruption insurance, which covers you for loss of income and increased expenses if your premises or fixed assets are damaged. Yet cash flow issues are a factor in 40 per cent of business failures.

Online businesses may need to consider insuring against loss of income due to computer breakdown or cybercrime.

Liability

Liability insurance covers risks to you, your employees or members of the public you deal with. (see case study)

Public liability insurance covers you for death or injury to third parties arising from your negligence and may be compulsory for some businesses. Product liability covers you for damage, injury or death to another person caused by the failure of a product, services or repairs you are selling. And if you are in the business of giving advice, professional indemnity protects you from legal action if someone suffers a loss after following your advice or receiving your service.

Once you’ve assessed potential risks and the insurance solutions to cover them, the type and amount of cover you take out is up to you, with a few notable exceptions.

Compulsory insurance

Two forms of insurance are compulsory for most Australian businesses.

Workers’ compensation protects your employees if they suffer a workplace accident or illness. Each state and territory operates its own workers’ compensation scheme.

If you own a motor vehicle, Compulsory Third Party (CTP) insurance covers you for personal injury claims by other people. This is often included in the registration process.

What will it cost?

There’s a lot to think about when you are starting a business or reviewing your operations, so it’s not surprising that a complex decision like insurance often ends up in the too-hard and too expensive basket.

The amount you pay for insurance will vary according to the nature of your business, the risks it’s exposed to and the policy’s inclusions and exclusions.

Most businesses opt for a business package that bundles different types of insurance together. This allows you to tailor your cover and is generally less expensive than buying policies separately. Business packages can be purchased direct from insurance companies without advice, or you can use an insurance broker who may be able to negotiate a better deal.

If you would like us to help you assess which risks your business is exposed to and how much cover you may need, give us a call.

Case study: Employers’ duty of careⁱⁱ

In a case that came before the NSW Supreme Court, a 28-year-old builder’s labourer (let’s call him John) was working on building site when a worker on an adjoining property fired a nail gun which penetrated a common wall and struck John in the head.

John suffered spinal cord injury, ongoing migraines, impaired balance and reduced control in his lower limbs.

The trial judge found that the operator of the nail gun and his employer owed a duty of care to John and ought to have known the risk of injury from a nail passing through a common wall. The judge also found they should have warned John, who was unaware of the risk, to move to a safe place. The employer was found liable and John was awarded over $1.4 million for his injuries.

Public liability insurance, held separately or in a business package, would normally pay out in these circumstances. Not having cover could send a business to the wall.

i ‘Biggest threats to Australian SMEs revealed’, Insurance Business Australia, 12 April 2018,https://www.insurancebusinessmag.com/au/news/breaking-news/biggest-threats-to-australian-smes-revealed-97563.aspx

ii ‘Nailing duty of care’, Hall and Wilcox, 2 July 2018, https://hallandwilcox.com.au/nailing-duty-of-care/