fine print

6 fundamental insurance questions small business owners are too polite to ask

Most first-time business owners are only vaguely aware their fledgling company needs insurance. And 30 seconds after the idea pops into their head, they push it right back out and decide to just hope for the best.

This is not a good strategy – actually, it’s not even a strategy. The reality is that any business owner who doesn’t want their cash flow or operating viability destroyed if a certain incident or circumstance occur needs insurance.

No one wants to look uneducated, but don’t let fear of asking a stupid question (or fear that all insurance professionals are shonky and won’t give you honest, unbiased information) stop you from understanding what business insurance is all about.

Instead, equip yourself with the knowledge you need to make informed decisions – whatever they may be!

Read time: 7 minutes.

1. Is insurance just a rip-off?

As an insurance broker, of course my answer to this question is a resounding NO. My reasons might surprise you though. In my eyes, business insurance is valuable for three key reasons:

  1. Running a business is stressful, and insurance buys you the peace of mind that comes with knowing your operations are no longer vulnerable to certain kinds of events. You keep paying your premium and if things go down a bit or an unexpected event that would otherwise wipe you out suddenly occurs, you know you’re going to be okay. It’s a pretty simple equation: insurance = less risk = less stress. Something every business owner wants!
  2. Getting the right business insurance forces you to spend time weighing up the unique risks and rewards for your market and operations. This type of in-depth evaluation, being half of the classic SWOT analysis, naturally reveals opportunities that your competitors are overlooking.
  3. Lenders and big clients can more comfortably invest in you when they know you have insurance backup. When your business is insured, investors are more willing to back you, banks can offer you better lending opportunities and you’re able to make the bold moves that propel your business forward, instead of keeping you plodding along at the same old pace.

Insurance in and of itself is not a rip-off: it gives peace, prosperity and opportunity. If, however, you don’t know what to look out for, then you can get a bad deal. We’ll get to that at point 6 of this article.

2. Is buying insurance betting on failure?

Yes, it is, but hedging your bets is a smart decision.

The business people who succeed long-term are the ones who carefully examine and plan for all the reasonable positive, neutral and negative outcomes of their situation. Insurance brokers are your experts at detecting and preventing the negative scenarios.

Go to a good insurance broker for, say, public liability insurance and you’ll soon find yourself in a conversation that dives deeply into the inner workings of your business. Expect to cover:

  • What your business model is
  • What your plans for expansion are
  • Who your clients are
  • How you pay your staff
  • Where you live and work
  • What your branding is
  • What your differentiation strategy is.

Once you have discussed all of these with your broker, they may then say: ‘Right, now here are the things we need to look at regarding your liabilities…’

This process is important, because you can only mitigate your risks after you have identified them. And facing your risks realistically is something only business owners with a certain level of sophistication or humility can do.

3. What are the differences between an insurer, an insurance broker and an insurance agent?

In answering this question, you must first understand that people usually source insurance in one of two ways:

  1. They’re directed to a big insurer by a comparison website or Google search
  2. Their accountant or lawyer refers them to an insurance broker.

In the case of option 1, the big insurers will either directly offer you a range of business insurance products (that are usually quite narrow in scope), or their insurance agents will intercede and consult with you about which of their employer’s product suites is best for you. (Note: An insurance agent can only sell their employers products.)

For option 2, however, an insurance broker has an unrestricted agreement to offer you the policies of any insurer. This means they’re free to sit down with you to figure out exactly what you need and what your business’ risks are. With that info they’ll shop around multiple insurance markets on your behalf. Once your broker has done their due diligence, they’ll come back to you with quotes and a recommendation about which insurance products and providers best suit your business’s needs.

4. Do I really need an insurance broker to help me understand the fine print?

Yes…with an if; no…with a but.

On one hand, Australian law is designed to protect consumers from being misled by insurers. When it comes to the PDS – or Product Disclosure Statement, the document containing what used to be called “fine print” – there is a ‘reasonable person test’.

It means if a reasonable person reading through the terms and conditions in the PDS would make a certain assumption, then, should a matter go to court, that assumption will generally be regarded as correct based on case precedence.

This puts the onus on the insurer to make their wordings clear, understandable and readable. If an insurance dispute does go to court and the wording is ambiguous or grey, more often than not, the courts will rule in favour of the claimant. In this regard, Australians are far more protected than, say, Americans.

On the other hand, most people do not want to read through their PDS – some are more than 50 pages. Even those who do read their PDS cover to cover usually have no idea of what to look for in terms of what has been left out.

A perfect example comes from the 2011 Queensland floods which destroyed something like 25,000 houses. Many homeowners who thought they had purchased adequate insurance beforehand were left up a creek without a paddle (pardon the pun). In the summary of their cover (the part that most people read) they saw “Flood cover: Yes”. Had they read the rest of the PDS, they would have seen this cover was capped at $50,000.

People were buying this policy partly because they thought it included “flood cover”. When they went to claim, they found they technically did have flood cover, but it was hardly enough to rebuild a devastated home.

Unlike most people, insurance brokers like myself love reading the fine print. We know which exclusions to look out for, which inclusions to ask for, and which insurers to steer clear of.

The above flood scenario wouldn’t happen to someone with a good insurance broker. We’re like any other trusted professional: you count on us to give you expert advice that’s in your best interest, because happy clients are in our best interest!

5. How could an insurance broker who doesn’t know my business possibly understand my risks?

Good question. If there’s one saying the entire insurance industry agrees on it’s probably: You don’t know what you don’t know.

I’m the first to concede that most small business owners understand the ins and outs of their own company far better than I could. At the same time, I also know that most people starting out on their business journey don’t have the time or inclination needed to study all the relevant risk trends affecting them. This is what insurance brokers like myself do (exciting, I know).

So, when a business owner and an insurance broker get together, they can combine their micro and macro understandings to form a full risk profile for the business at hand.

Take, for example, a cleaning business I am currently working with. The owner knew she needed cover for the equipment her staff use and could tell me down to the dollar the financial impact she’d suffer if one of those machines was out of action. She was also acutely aware of who her most important team members were. She knew all this, but had not accounted for one of the biggest risks her business faced: a new contract to have cleaners working at a shopping centre during business hours.

Most people wouldn’t bat an eyelid at a cleaner in a shopping centre, but most insurers would immediately recognise it as a very high-risk situation. Shopping centres are one of the most common places for slip, trip and fall personal injury claims. A single claim from a member of the public could have put her out of business or even bankrupted her!

Fortunately, once this particular business owner was made fully aware of this risk, I was able to work with her to mitigate it. We didn’t just source appropriate insurance, we also gave her advice on how she could reduce the likelihood of an accident occurring (which also lowered her premiums).

Now she’s insured and can keep her significant contracts and even land bigger contracts without having to worry about the real or perceived risks her business faces.

6. What are the warning signs for a dodgy insurance broker?

Every industry has bad apples. Insurance is no exception. The two tips I give to anyone looking for the right insurance broker for their business are:

  1. Ask other business owners for a referral. Insurance brokers are like lawyers and accountants in that much of their business comes from happy customers passing their details onto someone else. A great broker will get a lot of their business through the grapevine.
  2. Be wary of anyone who quotes without asking you questions about your business. Some brokers will send you a price for professional indemnity or other insurance products over the phone without even asking basic questions about what you do. In general, if the insurance is cheap and easy to get, it probably isn’t ideally suited to your business.

Ask tough questions to get good insurance cover

I really believe in the old saying: nothing ventured, nothing gained. Business insurance exists specifically to reinforce the “venture” part of that old proverb and make it more dependable. That’s why I truly believe the words underneath my logo: when you can repeat risks responsibly, you really reap rewards.

If you want to know more – or ask “stupid questions” – drop me a line at morgan.appleby@alleviate.insure. Why? Because there are no stupid questions.