Are you covered? A quick guide to business insurance
Being in your own business is inherently risky – in economic terms, that’s why the rewards can be so much larger than working for someone else. However, some of those risks can be mitigated.
Many types of business insurance exist to do that, and it can be difficult for entrepreneurs to decide what should and shouldn’t be covered. It is important to know about the different products that are available to Australian businesses and what they cover.
Some types of insurance are mandatory to businesses meeting certain criteria. In Australia, for example, if you employ staff you must have workers’ compensation insurance in place. Public liability insurance can also be obligatory if you work directly with the public.
Other types of business insurance may be demanded by banks or other business finance providers, as a condition of funding.
Types of Business Insurance
General Liability Insurance: Most businesses, however small, will have this. It provides cover if your business or its products or employees cause damage to a third party who then seeks compensation.
Professional Liability Insurance: Applicable to firms offering a professional service, this is different from general liability as it protects against damage claims should a customer allege you have failed to properly provide a service. It’s important to note that this isn’t usually covered by general liability insurance.
Property Insurance: If your business owns significant equipment or property, you will want to ensure that you don’t lose your business if a disaster befalls it.
Workers’ Compensation Insurance: If you employ other people, you will need to insure against possible accidents and injuries to them. This is a legal requirement in most developed nations.
Accounts Receivable Insurance (or Trade Credit Insurance): This protects you against the possibility that a client who has received your product or services fails to pay their bill. Accounts receivable insurance generally falls into the voluntary category, unless you cash flow finance via invoice finance: in which case, the provider of the funds against your invoices may require this insurance to be implemented (the invoice finance company would usually have a wholesale policy to cover your debtors).
Business Interruption Insurance: Additionally to covering against property loss, what if an unexpected calamity forced you to close down some or all operations for a period of time while it waits to be compensated? Business interruption insurance covers against this possibility.
What Insurance do you Need?
Apart from those forms of insurance which are a legal requirement, or a condition of obtaining a business loan or other business funding, it can be hard to decide whether you really need a certain type of cover. The list above is only a short summary of the most common kinds of business insurance available.
When deciding whether to take out cover, you will naturally want to consider the effect on your business should an uninsured loss occur. In many cases involving accidents and other liability, the legal costs alone would probably be enough to sink most SMEs.
It’s also worth thinking carefully about the effect on your cashflow if a single major customer failed to pay an invoice; or of having to close your premises for a week. Could your business survive that?
Finally, it’s important to remember that it’s not just your business which can be a danger to you. You can be a danger to your business, so you need to think about insuring yourself (known as: Keyman insurance). We looked at the effect of a partner in an enterprise dying in a previous blog – and if they are uninsured, the need to pay out their share to the estate can tear a business apart.
If you work from home, you should also be careful to insure against work-related incidents, as your household insurer will probably not consider business activities to fall under the scope of its cover.
It may be possible to buy many of the business insurance categories that you need as a bundle from a single insurer, but be careful to read the small print and seek advice if you think any critical activities aren’t included/covered. Naturally, these bundles don’t usually include personal cover for the business owner, a separate policy is taken out for this.