Do you know how much you are worth?

Virtually anything can be insured in the surplus lines market – even body parts.

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At the global insurance market hub Lloyd’s of London, there is a specialist area called the “surplus lines” market, which covers all of the unusual risks at which the regular underwriters balk.

Virtually anything can be insured in the surplus lines market – even body parts.

There, for example, singer Mariah Carey got her legs insured for US$35 million, as did supermodel Heidi Klum for US$4 million – although these amounts paled in comparison to the US$144 million to insure footballer Cristiano Ronaldo’s pegs. (Admittedly, Ronaldo’s workplace was potentially more dangerous to his legs than Klum’s or Carey’s.)

Carey also had her voice insured for US$35 million, as did The Boss, Bruce Springsteen, for US$6 million. Actor Julia Roberts had her teeth insured for US$30 million, while James Bond’s alter ego Daniel Craig got his whole body insured, for US$9 million, and Rolling Stones guitarist Keith Richards arranged US$2 million worth of cover for his hands. Food critic Egon Ronay insured his taste buds for US$400,000.

The point here is that each of these celebrities recognised their most important assets – the assets that have made them a fortune – and insured them.

Can every small business owner say the same?

Under-insurance is a significant problem in the small business arena. According to research undertaken for the Insurance Council of Australia (ICA) in 2015, 12.8% of Australian small businesses had no insurance.

Although that was a big decline from the 25.6% non-insurance rate reported in the 2005 ICA survey, it still equated to about 205,000 businesses that weren’t insured. 

The most commonly cited reasons for being inadequately insured were:

•  “I cannot afford to pay for more insurance;”
•  “Premiums are too high;” and a belief that
•  “You can never be adequately insured.”

It can be difficult for a small business owner to determine the types of insurance they need, and the right amount.

At the absolute minimum, there are the forms of insurance that are compulsory for Australian businesses. If you employ people, you must take out workers’ compensation insurance to protect your employees in the event of an accident or sickness. If you own a motor vehicle, you must pay for third-party personal injury insurance, which is often included in your vehicle registration fee.

After that, there is a wide range of insurance that could potentially be needed, from building and contents, business interruption, burglary, stock deterioration, to public liability, product liability, equipment/machinery breakdown and employee theft/fraud.

“How much insurance a small business need varies a lot, depending on the experience and competence of the business owner,” says small business adviser Dr Warren Harmer, founder of The Business Plan Company. “As the policy types get further from their experience, it becomes more guesswork.

“Professional indemnity (PI) is a common one where my clients really don’t know where to start, especially when they are starting out. I try to get them to understand the potential outcomes from their business if things go wrong.”

Harmer says most people have insurances like car, home and contents, so they transfer these concepts over to their business. “Business insurances are a lot more specific, with many more events covered and the owner can sometimes be ignorant and even worse, sometimes convince themselves that nothing will happen. So most businesses that need PI will eventually get it.”

Small business proprietors tend to overlook liabilities from their business activities, especially start-ups, he says. “When I complete a business plan I always check with the owner whether they have insurances. There have been many occasions where the owner has no insurance, even for those manufacturing foods.

“Business owners can easily convince themselves that risks are low and don’t want the additional expense of the premiums. Start-ups are often terrified of spending money and have no experience with most business insurances, which inhibits the understanding of importance, hence uptake. They will overlook product liability, professional indemnity and even public liability,” he says.

Expense becomes a limitation very quickly in small business, so extra insurances “drop off quickly” unless the owner is vigilant, says Harmer. “It doesn’t cost much more to have a high level of coverage, so I tend to err on the upside.”