With so many different types of business insurance available, it’s hard to know which insurances you need and the extent to which you need to cover your business. What protection does workers’ compensation, public liability and key person insurance offer? What’s not covered and how do you know how much cover you need? In this article, we look at what insurances are available to small businesses and the importance of ensuring your business is fully covered.

For many small businesses, the best way to go when taking out insurance is to buy a package of different products tailored to the unique requirements of the business’s circumstances.

According to Julie Scott from Marsh & McLennan Agency, most insurance business packages comprise insurances that cover damage to property caused by events such as fire, business interruption, theft and public liability. Additional insurance cover that is important for small businesses includes workers’ compensation, key person insurance and machinery breakdown.

Interestingly, workers’ compensation insurance – which covers injuries to staff members – is structured differently to other insurances. “With this type of insurance, the premium you pay is based on your business’s total wages. The business owner estimates wage expenses 12 months in advance and receives cover for this. At the end of 12 months, the owner declares the actual amount spent on wages and makes a subsequent payment based on the difference between the actual and estimated amount. So if you have cover for $300,000 and at the end of the year your wages bill is $350,000, you’re still covered, but you need to make a payment to make up the difference.”

Public liability covers personal injury or property damage caused by an occurrence at your business. Businesses have a duty of care to provide a safe environment and, if an individual suffers an injury at a place of business, the business may be covered for the cost of the damages awarded to the individual, as well as court costs, if ordered by the court. For example, “If a customer slips on a wet floor, and no precautions were taken to warn people, like having a caution sign visible, the duty of care is evidently breached and the policy still may respond.” A related insurance is product liability insurance, which covers damage or injury caused by a product a business makes or imports.

“The reason why it makes sense to take out an insurance business package is because an event might trigger claims under a number of policies,” explains Scott. “Let’s say your business suffers a fire due to an electrical fault, the business owner could claim against the property insurance included in the package, and also claim under the business interruption cover. Business interruption is such an important policy for small businesses because it will cover the business owner for income lost due to time spent removing debris and finalising the insurance claim,” she says.

An insurance many businesses overlook, but which is essential for businesses that would be severely financialy impacted by the death or disability of an important employee, is key person insurance. Thought needs to be given to how your business would continue in the event a key staff member – or financial contributor – suffers a serious accident or passes away.

It’s also worth exploring whether it’s necessary to separately insure some aspects of the business. For example, although machinery breakdown insurance can be included in a business package, if the business requires higher levels of cover because it relies on expensive machinery to function – like a manufacturing plant – it could make sense to take out a stand-alone machinery breakdown insurance policy in case the business isn’t fully covered by the cover provided by the business package.

But, says Scott, one of the biggest traps a small business owner can fall into is to underestimate the value of the property covered by the claim. “If you’ve insured the property for $100,000, but the value of the property lost is assessed to be, say, $150,000, the policyholder will only receive a payout up to 80 per cent of the insured amount. So you could find yourself with $150,000 worth of damaged property and only receive a payout of $80,000,” she says.

The key message is to determine the main risks the business faces by undertaking a thorough risk assessment process, review existing insurances the business has in place and undertake a gap analysis to ascertain potential risks for which the business is not covered. Then, it’s an idea to explore the additional insurance policies the business could consider, to help give the business owner comfort that, should a key risk facing the business materialise, the enterprise will remain viable.


_______________

This article contains general information, does not take into account your individual objectives, financial situation or needs. For full details of the terms, conditions and limitations of the covers, refer to the specific policy wordings and/or Product Disclosure Statements available from Marsh on request. Marsh Pty Ltd ABN 86 004 651 512, AFSL 238939 arrange the insurance and is not the insurer.

Copyright 2011 Marsh Pty Ltd

All rights reserved.