The five big risks that business owners underestimate

There is an element of risk when starting – and building – any business enterprise. It's what drives entrepreneurs and can make the difference between success and failure.

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There is an element of risk when starting – and building – any business enterprise. It's what drives entrepreneurs and can make the difference between success and failure.

Risk is the constant companion for the small business owner, but it can be mitigated by comprehensive insurance cover.

Not all risks, however, are immediately apparent. Here are five that are often ignored.

1. Personnel risks

By their nature, small businesses are prone to “key person” risk: the risk that the owner of the business, or one of the partners, or a long-standing employee that holds much of the business’ knowledge, can be removed from the business through accident or illness.

Many small businesses have “star” people, who are critical to the operation, and cannot be replaced easily, if at all. Current business agreements, customer relationships, sales contracts and even the ability to run the business can be lost overnight with an immediate, and possibly disastrous, impact on revenue.

Covering the loss of critical personnel should be built-in to your general business insurance cover.

2. Business interruption risk

Many business owners do not realise the extent to which they are exposed to the risk of a major interruption to their business, from natural disasters or the failure of the essential infrastructure on which our society relies. But South Australia experienced a sobering example of this risk in 2016 when a power failure shut down the state’s electricity grid.

Many regional South Australian businesses were without power for several days, severely disrupting their operations. One supermarket was forced to throw out perishable stock worth hundreds of thousands of dollars.

Speaking about the effect of the blackout on South Australian small businesses, the Insurance Council of Australia’s general manager of risk, Karl Sullivan, said that small businesses were less likely to have insurance cover that properly protected them from power outages.

Natural disasters and infrastructure failures can do irreparable damage to businesses – making business interruption insurance, which is like income protection but for a business, a must.

3. Liability losses

Any business could become liable for damages caused to another person or property by its products, operations or premises. The threat of potential claims and litigation is ever present for a small business, and arguably, in today’s times, it is increasing. And you can’t predict the unpredictable. 

For example, a patron who slipped and fell on a wet floor outside a New South Wales restaurant, and suffered injury to her shoulder, back, arm and wrist was awarded more than $350,000 in damages to compensate her. The New South Wales District court found the restaurant was negligent because it did not have signs highlighting the wet areas and had not made an adequate attempt to mop it up.

The most common form is public liability insurance which protects you and your business against the financial risk of being found liable for personal injury, property damage and economic loss. 

Professional indemnity insurance will also be relevant to many small businesses: it protects you and your business against claims for alleged negligence or breach of duty arising from an act, error or omission in the performance of professional services.

Then there is management liability insurance, which protects you and the company against the risks and exposures of running the company – where a claim alleges that you mismanaged your company and caused loss to others. The workplace can be a complex human interaction: claims of wrongful dismissal, sexual harassment and bullying are just a few of the many types of litigation that business owners could face.

4. Cyber risk

Cyber insurance is one of the more commonly overlooked insurance areas. Yet, according to the 2016 Cyber Security Survey by the federal government’s Australian Cyber Security Centre, 90 per cent of Australian organisations experienced some form of attempted or successful cybersecurity compromise in 2016.

Data breaches, computer hacking, employee error, and even the shutdown of operating systems are all examples of risk areas that are increasingly significant for businesses – but which may not be covered by the conventional insurance portfolio.

5. Intellectual property risk

Intellectual property is one of the main assets that business owners fail to protect and includes things like:

• your trademark;
• your brand;
• copyright;
• patents;
• domain name; and
• products, recipes, software programs, apps or processes you’ve created.

An IP insurance policy can provide protection for legal costs to enforce claims against people infringing on your IP, in Australia or worldwide: this includes damages such as loss of profits or reputation and settlements. This insurance can also cover the legal cost for defending infringement claims made against you – including claims made against your customers or licensees.

Originally published as The five big risks that business owners underestimate