How to choose the right insurance for your business

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Why is this important?

Insurance is an essential part of running any business. Taking out the right insurance will help protect your business and minimise its exposure to risk.

Your insurance requirements will vary according to the type of business you are operating, but you should be aware that some forms of insurance are compulsory, such as workers compensation and third party car insurance.

When you're in business you deal with a variety of potential risks each day. Risk is not something you can avoid, but it is something you can manage. Risk management will increase the probability of success and reduce the probability of failure of your business.

What to do

Before you decide on insurance you need to investigate the different insurances available to determine which insurance will protect your business and minimise any risks. There are a range of insurances available which cover all aspects of your business including your business assets and revenue, you and your staff, public and private liability and professional indemnity.

1. Assets and revenue insurance

To protect your assets and revenue-generating capacity, here are some of the types of insurance available:

Building and contents

This covers the building, contents and stock of your business against fire and other perils such as earthquake, lightning, storms, impact, malicious damage, and explosion.

Burglary

This insures your business assets against burglary, and is most important for retailers or a business which maintains unattended premises.

Business interruption or loss of profits

This covers you if your business is interrupted through damage to property by fire or other insured perils. Ensures your ongoing expenses are met and anticipated net profit is maintained through a provision of cash flow.

Fidelity guarantee

This covers losses resulting from misappropriation by employees who embezzle or steal.

Machinery breakdown

This protects your business when mechanical and electrical plant and machinery at the work site break down.

Motor vehicle

It is compulsory to insure all company or business vehicles for third party injury liability. Many different types of policies are available, so make sure you understand the options before making a decision. There are four basic options:

Compulsory third party (injury) — covers you for claims made against you for personal injuries and legal costs arising from the use of your car. You must obtain this insurance to register your car.
Third party property damage — covers your liability for damage to another person or to the property of others and your legal costs. It doesn't include repairs to your own car if you caused an accident.
Third party, fire and theft — covers you against the events covered above, as well as fire and theft. It also insures against damage caused if your car was stolen.
Comprehensive — covers you for all of the above plus damage caused to your own car by you in an accident. If you're buying a car on an instalment basis, financiers will usually insist on this cover.

2. People and insurance

This is compulsory for all businesses employing staff. Workers compensation insures employees against injury or death caused in the workplace. The workers compensation system in NSW is administered by WorkCover.

Personal accident and illness

If you are self employed you won't be covered by workers compensation, so you need to cover yourself for accident and sickness insurance through a private insurer.

There are several types of life insurance. Some are investment-type funds where you contribute over a certain time and get back your investment plus interest earnings at the maturity date. Others are designed to cover risk - things that could happen to you:

Income protection or disability insurance — covers part of your normal income if you are prevented from working through sickness or accident.
Trauma insurance — provides a lump sum when you are diagnosed with one of several specified life threatening illnesses.
Term life insurance or whole of life cover — provides your dependents with a lump sum if you die.
Total and permanent disability insurance — provides a lump sum only if you are totally and permanently disabled before retirement.

Superannuation

If you are running a business or employing people, you are likely to have superannuation obligations to your employees. If you are self-employed you also need to provide for your retirement — superannuation is generally used to provide for a retirement plan.

3. Liability and Insurance

Public liability

Public liability insurance protects you and your business against the financial risk of being found liable to a third party for death or injury, loss or damage of property or ‘pure economic' loss resulting from your negligence.

Professional indemnity

Professional indemnity insurance protects you from legal action taken for losses incurred as a result of your advice. It provides indemnity cover if your client suffers a loss — either material, financial or physical — directly attributed to negligent acts.

Product liability

If you sell, supply or deliver goods, even in the form of repair or service, you may need cover against claims of goods causing injury or damage. Product liability insurance covers damage or injury caused to another business or person by the failure of your product or the product you are selling.

4. Evaluating the policy

When contacting insurance companies or brokers with your enquiries, it is important to appropriately disclose information in order to get the most precise insurance policy for your needs. By not disclosing all relevant or providing false information, your policy may not be valid. It is also essential that you keep the insurance company up to date with any changes to your personal details or circumstances.

Prior to entering into a policy, make sure you:

Check what is and what is not covered — Look at the wording and definitions.
Are you under-insured? — It is very important that you insure your assets for their replacement value in today's prices. If you are not sure of the replacement cost, you may need the services of a qualified valuer to establish what your assets are worth.
Do you understand the term co-insurance? — You are deemed to be co-insured to the extent that the risk is under-insured, ie you will only be compensated for a proportion of the total loss.
When does your protection commence? — That is, immediate cover or otherwise.
Conditions of insurance — Note particular activities relating to the nature of your business. Are these activities excluded from the policy?
Check the claims procedures — Can you rely on straightforward and prompt service? Ask other similar businesses what their experience has been.
Do you understand the terms of a replacement policy? — A replacement policy aims to replace or restore property as new. These policies often have an upper limit on the amount payable.
Renewal conditions — Are increases in value built in the policy or do you have to declare any appreciation in asset value?
Reputation — Look at the insurance company's track record and whether it is well established. Are they prepared to discuss with you your insurance needs without undue pressure to buy?
Compare policies — Get at least three quotes. Compare insurance premiums as well as any no-claim bonuses or discounts available.
Negotiate pricing — Be prepared to negotiate with the broker or insurance company. You may be able to reduce overall insurance costs by grouping different insurance types with one provider or achieve discounts by seeking reductions in initial pricing quotations.

5. Risk management

Risks to your business can arise for many reasons — interest rate or price increases, your competitors' activities, injuries through hazards in the workplace, skilled staff leaving, natural disasters or terrorist activities. Managing those risks is an important part of running your business.

Risk management is a systematic process of making a realistic evaluation of the true level of risks to your business. Before risks can be properly managed they need to be identified - you can begin with these questions:

What can go wrong?
What can we do to prevent it?
What do we do if it happens?

There are standard procedures and processes to handle risk management in business. Standards Australia has developed a Standard, AS/NZS 4360:2004, Risk management that outlines procedures and processes to implement.

A good plan is to develop a risk register to document each potential problem, its level of seriousness, what is required to fix it and who will fix the problem.

Source: www.smexcellence.com.au

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