Risky business: The costly oversight killing your company

IT'S a bill no one likes to pay and is something most don't want to think about. But this oversight could end up costing more than just your livelihood.

small business

THREE quarters of small and medium businesses are risking major financial losses by failing to take out adequate insurance cover, it has been revealed.

The nation’s insurance industry has warned Australia’s business owners they face being hundreds of thousands, and in some cases millions, of dollars out of pocket by not properly protecting themselves and their assets.

The warning follows research compiled by the insurance industry which showed between 70 and 80 per cent of Australian businesses have inadequate insurance cover, with small operators in particular regarding it as a "grudge purchase".

Many small business proprietors baulk at the cost of the policies available to them and either minimise the coverage - or neglect covers entirely, research showed.

Others also make the mistake of incorrectly valuing stock and assets when choosing a policy, or are unaware that the value may increase over time.

However Senior Leader in AAMI’s Commercial Portfolio team Mr Paul Sciberras said small and micro operators in particular could avoid stress and financial heartache later by just going online.

He said those businesses with five or less employees such as a hairdresser or corner shop owner, only needed a simple level of cover and could save hundreds of thousands in financial losses.

"There are also specialised options for those who run their businesses from home. Business policies can be bundled together with home and contents insurance, and car insurance, for instance," he said.

"For a minimum amount of hassle, business operators can protect their investments and all their hard work."

However Leigh Smith, Senior Leader, Commercial Portfolio at GIO, admitted this became more complicated as a business grows but that it was vital owners got the right advice from a commercial specialist.

"As your business grows, so do the risks. More importantly, the risks also grow more complex - it’s not simply a matter of insuring your premises and business contents," he said.

According to Mr Smith, the top five ways businesses are failing to under-insure themselves include:

1. Undervaluing stock, business equipment or buildings
"This is one of the most common ways a business owner can find themselves in trouble after an event such as a fire, storm or earthquake," he said. "Business owners should insure their business contents, stock and buildings with Fire cover (sometimes called Property Damage).
"However, problems can arise when the level of cover nominated by the owner is too low. Many owners decide to insure below the total replacement cost, reasoning that it is unlikely they will lose all of their assets in one event."

2. Neglecting business interruption
"Business Interruption can be taken with Fire cover and insures you for loss of revenue after an insured event," Mr Smith said. "While your income may stop after a loss, many expenses will continue and it can be months, or even years, before you’re back to your old level of turnover. Even a small amount of property damage can cause significant disruption to a businesses cashflow."

3. Neglecting specific covers
Mr Smith said many small businesses will typically take out an insurance package that combines several different covers in a single policy but that that they were failing to take out specific cover.
"For instance, you might take out Burglary/Theft cover, which insures the loss of stock and business contents from theft and armed hold ups, but does not cover stolen cash," he said.

4. Leasing commercial properties
Business owners are often required to insure some elements of the building themselves, such as glass cover as part of their lease, but may not be aware this is the case meaning if there is a burglary or accidental breakage they may not be covered for any potential losses.

5. Cancelling liability insurance
Mr Smith said this was the biggest risk facing tradies who may cancel their cover while on leave or after a contract is finished but failed to reactive the policy once they returned to a job site, potentially leaving themselves open to a liability claim.
"By doing this they are making the dangerous mistake of assuming they are only exposed to claims for compensation when they are actually working, so they try to save money during the downtime," he said.