A one-size-fits-all approach to insurance could be disastrous for your business – Terry Brain explores the danger areas and insurance policies that can be tailored to your business needs.
One of the biggest challenges for small business owners is ensuring that their business is protected. The easiest and most common way to do this is to take out business insurance.
There is now a wide range of insurance products which can help provide protection, and these can usually be tailored to meet the very specific needs of small and medium businesses.
However, while there is a high level of awareness within the business community of the need for insurance, and of some of the different products around, the biggest issue is the gap between the awareness of the need to have insurance and actually taking action to implement it.
Most businesses have property insurance and company vehicle insurance, but there are other, equally important forms of insurance that could mean the difference between your business continuing or going under. For example, income protection insurance. The majority of small businesses are highly dependant upon their owners and stakeholders. Recent surveys of SMEs reveals while there is an 87 percent awareness of the benefits of income protection, only 50 percent of small business owners bothered to carry such cover.
Studies show a 40-year-old male has a one-in-three chance of suffering a medical trauma such as critical illness, which will impact his ability to work for a period of three months. If he is the owner of a small business, how well will the business continue to operate without him for this period?
There are other instances where appropriate insurance can have a significant impact on the ability of a business to continue operating. For example, a business owner may sign a personal guarantee when negotiating business finance, such as the lease of capital equipment. But in doing so, they bind their estate absolutely. Their death or disablement could put family assets at risk that have been built up over a lifetime of hard work. However, there is life assurance structured specifically for this situation that can protect family members.
Forms of Insurance
Another form of insurance that should be considered by every business owner is key-
person insurance. In most small businesses, there are individuals upon whom the business is most reliant. Their talent, personal networks, technical knowledge or sales skills are responsible for a significant portion of revenue, and the viability of the business would be severely impacted if anything happened to them. Key-person insurance protects against loss of revenue if, for example, this person leaves the business, and can also help finance the cost of locating and appointing a suitable replacement.
There are many other forms of insurance that all small businesses should consider. Most insurance brokers are very experienced at advising business owners on ways to manage their exposure to business risks.
For many years the insurance broking community has operated under a voluntary Code of Conduct. In essence this is a commitment by a broker to apply their best endeavours on behalf of their clients. Recently, the Financial Services Reform Act (FSRA) imposed additional obligations on brokers and advisers when providing advice on insurance products such as home and domestic policies, as well as advice to small businesses with less than 100 employees.
The main obligation under the Act is that insurance brokers must provide a Statement of Advice (SOA) to allow absolute transparency. A Statement of Advice (SOA) defines the scope of the advice provided, reflects knowledge and understanding of the client’s circumstances, and explains why a particular policy or strategy is recommended.
It must also disclose any brokerage the broker might earn from the transaction together with any ‘soft dollar’ inducements such as eligibility for trips, subsidised office equipment, discounted shares in the insurer.
However, insurance doesn’t always mean taking out a policy with an agent. It can also mean simply putting in place policies and procedures that can protect the business from specific events. For example, one of the most important areas that needs consideration is an exit strategy.
Many small businesses successfully evolve because of the energy and commitment of their key stakeholders. Individuals with the necessary energy and commitment are often inspired by comparatively simple ideas to take a risk and commence a business without any real thought to how they might ultimately exit that business, putting its continuation at risk.
As baby boomers rush towards retirement, many small business owners are for the first time contemplating these issues. It is not too late for the next generation to start planning for the inevitable. A number of other factors need to be considered, including how the business is structured and what documentation, if any, exists to protect the interests of multiple stakeholders. Some exit events are unplanned for, such as business failure, change in industry dynamics, or irreconcilable stakeholder disputes.
There are also certain exit events which stakeholders can insure against, for example untimely death, disablement or long-term illness of a business principal. By taking a team approach to such contingencies, business owners can structure and document a succession plan to ensure there can be an orderly transfer of their interest in the business.
Businesses are about people. In small business in particular, people are often the most valuable asset. Don’t make the discovery when it’s too late. Conduct an audit of the business risks that are people-related and ensure proper protection is in place.
* Terry Brain is a director of Risk and Business Consultants, a specialist consultancy to accountants and financial planners and their clients.
Insurance for SMEs
For SMEs, the right insurance can be vital protection. Some types of insurance to consider include:
Key-person is useful for businesses that rely heavily on the involvement of one key person, as many SMEs do. Life insurance can be taken out by the business on the life of that person to help manage and recover from the financial loss that could occur following their death or disability.
Fire and other damage covers damage to the business’s premises (and its contents and inventory) from certain specified events such as fire, storm impact, lightning, explosion, earthquake. It can also include the cost of removing any debris. Standard policies often don’t include flood damage.
Burglary covers the theft of stock, electronic equipment and other business contents following a forced or unauthorised entry onto business premises.
Business interruption specifically covers the business for the loss of income or profit following an interruption to operation of the business, for example following a fire or theft.
General property covers specific work items such as mobile phones and laptop computers. It is particularly useful for items that are portable and so may not always be kept on business premises.
Glass and signs covers the replacement of windows or signage, including the cost of temporary shuttering, replacement of sign writing, and the cost of any stock spoiled.
Public and products liability covers the business’s legal liability for personal injury or damage to property caused by someone or something to do with the business.
Business vehicle covers business vehicles against events such as an accident, theft or attempted theft, fire, lightning or explosion. It is particularly important for businesses that rely on
vehicles as it can also include the provision of replacement vehicles if required.
Internal fraud or theft covers the theft of business property or money by employees. Such theft can be a significant cost to the business as it can often go unnoticed for a long period of time.
Stock or inventory covers the business from the deterioration or spoiling of stock, for example if a refrigeration system fails.
