Look before you leap

Business Insurance 101: The Fundamental Concepts

This article is for people who don’t understand business insurance, but need to. This usually means you’re in business yourself. And, if you’re in business already, then you probably already have the main thing you need to make enough sense of the whole topic of business insurance: instincts. There are two major business instincts relevant here:

  • Business Instinct A: Am I getting a fair deal?
  • Business Instinct B: Do I know enough to know if I’m getting a fair deal?

In this article, I’m going to cover the basics of business insurance so that when you’re ready to get cover, you’ll have your bearings and know the right questions to ask. I’m going to fill you in on a bit of B so you have a sharper instinct A.

What is insurance?

In short, insurance is a promise (contract) between you and your insurer wherein you both agree that if an “insurable event” happens to you in the next 365 days and you’ve paid your premiums (a fixed cost outlined in your contract), the insurer will pay you a certain amount of money to cover your losses.

However, as you might have guessed, not all promises are alike. The types of events that you can be insured against, the amount of money you have to pay your insurer every billing period, and what you can claim if the worst happens will all vary according to which insurer, policy and type of insurance you take out.  

No insurance policy will ever cover every risk associated with running a business. Not only is it impossible to plan for every single thing that might happen to your company, but even if an insurer could do that their premiums would be through the roof.

This is where prudent advice and good risk management come into play. A good insurance broker will study and understand your business. Once they have a good grasp on your revenue streams, they’ll be able to explain in depth:

  • the cover you have
  • the cover you need
  • the cover you can probably do without.

Most importantly they will be able to tell which of your risks are uninsurable.

Then, if they’re qualified or educated to do so through some form of academic qualifications in risk management, they’ll also guide you through setting up procedures in your business to try to alleviate some of the unknowns to help keep your insurance premiums reasonable and sustainable.

How insurers decide the value of a policy

Insurance companies rely on specialists called actuaries to calculate the risks in a specific occupation or industry.

Actuaries study every single detail of a business operation and then use algorithmic models to calculate insurance premiums. For example, an actuary at a sawmill will consider many factors including (but by no means limited to):

  • Geographic business location
  • Type of timber
  • Age of equipment
  • Staff training
  • Construction of the business facility
  • Nearby emergency services support
  • Local environment
  • Historical industry data on prior claims.

Once they have these and hundreds more data points, the actuary gets number crunching. From their findings, they then advise the insurers as to what the risk profile of the operation is. Using this information, the insurer can work out what a profitable yet fair insurance premium would look like and what their policy will and will not cover.

The 7 types of insurance your business might need

Many businesses underestimate how much risk they’re exposed to every day. While most business people are aware that their company could be affected by a fire, burglary, flooding, equipment breakdowns or some kind of accident, they don’t realise that there are many other very real threats they should insure against. Let’s look at a few:

  1. Professional liability insurance: If you’re a professional, chances are that a mistake you make could cause one of your clients financial loss – and those are the type of mistakes that preface lawsuits. This insurance isn’t just for doctors or lawyers, however. Even a marketing professional who is responsible for a brand’s image should consider taking out professional liability insurance. If you’re good at what you do, chances of a claim is unlikely. The problem is that it’s usually the legal defence costs that result in a higher expense that the actual financial loss itself.
  2. Product liability insurance: What would you do if a product you manufacture causes property damage, injures or even kills a consumer? If you have product liability insurance, you can rest assured knowing that a personal injury or property damage lawsuit won’t destroy your business. A common misunderstanding in product-type exposures are your obligations under Australian law. In short, if you import anything for ‘resale’ under our legislation, you are deemed to be the ‘manufacturer’ of that product.
  3. Public liability insurance: Does your business interact with the public? If so, you need to know that in the event that someone is injured or their property is damaged while you’re providing your services, you could be liable to cover their losses. Public liability insurance is designed to protect you from this.
  4. Property insurance: Anyone whose business is located within a specific physical premises needs property insurance. This type of insurance is designed to ensure that both the building you operate out of and the equipment and inventory within it are covered in the event of a fire, flood or break-in.
  5. WorkCover: Every Queensland business that employs workers is legally obligated to insure against workplace accidents with a WorkCover policy. Other jurisdictions have similar regulations.
  6. Business interruption insurance: How long could your business survive an unexpected interruption to trade? One week? One month? One year? This type of insurance can help contribute to your cash flow if you experience a loss of revenue, a loss of name and good fame, or some other event that interrupts trade.
  7. Car insurance: Taking out a policy for your work vehicles is a no-brainer. You insure your family car, so why wouldn’t you do the same for your business cars?

How business insurance differs from personal insurance

First up: personal insurance policies are a lot simpler than business policies. While people who don’t own businesses simply need to insure tangible assets like their income and property, business owners must insure both tangible and intangible assets (such as loss of trade).

For example, consider the many questions that must be asked when a loss of trade claim is being evaluated:

  • Who/what is responsible for the loss of trade?
  • Has the business also suffered a loss of reputation?
  • Are there measurable lost opportunities?
  • Is the business’s revenue straightforward and easy to average, or do recent records include windfalls?
  • Will purchases need to be made to restore the business to its former earning capacity?
  • How much revenue will be lost until those purchases are made?
  • How do each of these factors affect the other factors?

The more business insurance research you do, the more you realise how irreducibly complex your business is! There are so many different cogs in the machine, and they must all work together for you to make a safely insurable profit.

If your livelihood hinges upon your business working smoothly every day, I cannot overstate how important it is that you have a backup plan for if/when one of these cogs conks out!

5 tips for making your business more insurable

When it comes to buying insurance for your business, there are steps you can take to get access to more cheaper premiums. If you want the most competitive offers on the market, it’s a good idea to:

  1. Mitigate risks: Have policies and procedures (safety training, risk management reviews, etc.) in place that reduce the likelihood of an incident happening in the first place. This is often the best and cheapest form of ‘insurance’ possible.
  2. Improve security around your business: Installing alarms, cameras, sprinklers, digital security protocols and other security products may be a significant short-term cost to your business, but this can help you save a lot on your premiums over the long term.
  3. Bundle your insurance: If you own multiple businesses, you may be able to get a better deal by insuring them all under one company. Just make sure that each policy provides adequate, tailored coverage for its corresponding business.
  4. Pay in advance: As with health and vehicle insurance, you’ll pay more if you opt to pay monthly. If you can, pay your premiums for the whole year in one go.
  5. Use a broker: Cheap insurance isn’t always good insurance, so unless you enjoy reading fine print and studying industry jargon, it’s a good idea to find an independent broker who will do the research and bargaining for you.

How you can invalidate your business insurance policy

When you take out a standard business insurance policy, you can rightfully then expect to be provided with 12 months of cover. There are, however, certain circumstances that can invalidate your insurance policy. These include:

  • Failure to pay premiums: If you miss a payment you may not be covered until you’re caught up again.
  • Deception (deliberate or accidental): If you make a false statement (whether deliberately or accidentally) about one or more aspects of your business during your application process, not only will this deception affect whether your future claims will be paid out, you may also find yourself in trouble with the law! You must always be honest with your insurer and disclose all relevant information. The rule of thumb here: if you’re not sure, get advice.
  • Illegal activities: In the event your business incurs a loss because of your criminal behaviour, don’t expect your insurer to pick up the slack.

In addition to these definite deal-breakers, most policies will include other exclusions. It’s important to understand what your policy will and won’t cover.

Don’t be afraid to ask your insurance broker or the insurer themselves very specific ‘what if’ questions. It’s better to pay a little bit more for the cover you need than to be paying low premiums for a policy that won’t help you out when you really need it!

Business insurance 101

So there you have it, the basics of business insurance. We have looked at what insurance really is and touched on how insurers go about offering it.

You now have a grounding in the basic types of business insurance and how the field differs from personal insurance. And last, we touched on ways you can make your business more insurable … plus a few things you can do to make it much, much less insurable.

All that lot should be enough to satisfy Business Instinct B (knowing enough to make the next step) as mentioned back in the introduction. So, what is the next step that’s going to start exercising Business Instinct A? Find an insurer or insurance broker to apply all the concepts we have talked about to your specific situation.

Get the risks right, and you’ll be able to safely repeat them … and reap the rewards. Want to know more about how business insurance is a crucial gateway to growth? Drop me a line: morgan.appleby@alleviate.insure