Australia is one of the most underinsured nations in the developed world in terms of Personal Insurance, and sadly, many small business owners are not much better when it comes to insuring themselves and their businesses.
Insurance is all about getting the right balance. “You don’t want to under-insure, which occurs when the amount covered by a policy is less than the value of what’s being insured, but over-insuring is a waste of money and puts unnecessary pressure on your funds. This is why it is helpful to involve an independent broker or consultant who can help you secure the right insurance at the best price,” says Rener Lao, CEO of AccountsTeam.
So where do you start? First, you need to be able to distinguish between which insurances are required by law, which ones are essential in running a business, and which ones are just good to have.
Worker’s Compensation is a requirement for all businesses employing staff and is legislated differently in each state but generally includes gross wages and superannuation. It covers employees against injuries or death in the workplace. This is compulsory even if you’re the only employee of an incorporated company, but not if you are a sole trader or under a partnership. Workers Compensation specifically applies to work-related injuries in the workplace and is separate to Income Protection, which protects your income if you are unable to work due to unexpected sickness or injury.
When considering Workers Compensation policies, it pays to classify your employees’ roles according to what health and safety risks are involved to ensure that you don’t pay higher premiums for less risky jobs. Lao says: “Companies that have separate cover for clerks, drivers and loaders can save millions of dollars in Workers Compensation insurance premiums.”
Public Liability is another essential insurance for small businesses, even if you don’t have a physical office. This cover includes compensation for third party property damage, injuries or death as a result of business operations, including if an employee causes personal injury or property damage while visiting a client’s office.
“For home-based businesses and start-ups, home insurance does not cover your business so make sure you have a Public Liability cover, especially if you have clients and staff visiting you. And if you use your car to visit clients or attend work sites, don’t forget to insure your car for business use,” adds Lao.
What if you have customers overseas and use virtual or serviced offices abroad? It’s important to make sure that the rental or service agreement with your office provider has an equivalent cover of public liability. According to Lao, many overseas providers do not actually cover for these risks, which could leave you exposed to claims for third party injury or damages. If you use a virtual or serviced office in Australia you should also see if your agreement includes Public Liability.
Professional Indemnity is essential for businesses that provide professional advice, because someone following your advice can sue consultants and advisors for financial loss due to errors or omissions incurred. “It’s important to have extended cover or ‘run-off’ cover that remains in force even after you give the advice, for example upon retirement,” says Lao.
Make sure you check what sort of jurisdictional or territorial cover you have. For example, having jurisdictional cover for the U.S. in particular can be expensive so it’s best to avoid this by structuring your operations well and having all your contracts executed under an Australian state jurisdiction.
The amount of Professional Indemnity cover that you need depends on the nature of advice your business provides, the qualifications and experience of the principal, and the size and quality of the contracts that the business executes. “I always advise my clients to take the time to get three quotes from different insurance providers to get the best price available. You’d be surprised at the differences in price and level of speciality for different industries,” says Lao.
Product Liability and General Property
Product Liability is essential for businesses that sell, import, modify or repair goods. This insurance covers claims on goods or products that have caused injury or damage. “Many start-ups forget to take into account the potential cost of insurance premiums for Product Liability in their early business plans. Based on the cost, some businesses actually reconsider manufacturing or selling certain high risk products,” Lao says.
General Property Insurance is cover for loss of tools, stock, office content, and damage to buildings and contents caused by fire, earthquakes, storms, explosions, malicious damage, and also theft.
Lao explains that as a general rule, the cheaper the policy is, the more restrictions it has. So it is important to read the fine print, especially in the exclusions section. “For instance, most policies don’t provide cover for floods caused by overflowing rivers. In the 2010/11 Queensland floods, many affected businesses that hadn’t sought independent advice or read the fine print learned the hard way that the business cover they had wasn’t sufficient.”
Business Interruption and Income
It is also worth considering protecting your business against any losses incurred by interruptions due to fire and perils (Business Interruption or Business Income Insurance), claims and legal costs due to employment-related allegations like sexual harassment and unfair dismissal (Employment Practices Liability Insurance), and the cost of your accountant preparing information required by an ATO audit (Tax Audit Insurance). “With increasingly complex legislation concerning directors’ obligations, it might also be worthwhile getting cover for legal costs incurred in defending directors and officers that are sued for negligence in carrying out their duties,” adds Lao.
Rick Mapperson, director of Rick Mapperson and Associates, agrees that planning ahead for your business is just as important as the initial planning stages of a start-up business. “But it need not be as daunting,” he adds.
Tragically, many small business owners who cannot work due to unexpected injury or illness can’t afford the cost of living and find themselves having to the sell their business. This is where Income Protection comes in. Income Protection policies can replace up to 75 percent of your salary if you are unable to work due to unexpected illness or injury, as opposed to Workers Compensation, which covers your employees against injury or death in the workplace.
“Small business owners are the most important asset to their business, and their insurance cover should reflect this. It is important for small business owners to have Income Protection because it means that they don’t need to rely on their business to pay the bills. Instead of facing the possibility of losing the business to cover costs, a succession plan kicks in and their income protection insurance helps pay the bills instead,” Mapperson says.
Small business owners’ income tends to fluctuate and is often more complicated than employees of medium-to-large sized businesses. For example, income may be determined by the profitability of the business at any given time, and it may come from multiple sources or even double as business savings.
“There are many different kinds of Income Insurance and not all will suit the small business owner or provide adequate cover. And understanding the differences in Personal Insurance policies can be like reading a new language for the first time! You can save yourself a lot of time and money by talking to a specialist in Personal Insurance that can assess your situation and offer for the best solution.”
Personal Insurance within Super
Many Australians are unknowingly underinsured. In other words, they think that they have adequate cover but they actually don’t. On a daily basis, Mapperson has to battle with the incorrect assumption that Personal Insurance within superannuation is sufficient. In most cases, this isn’t true. Rice Warner Actuaries estimate that Life Insurance cover within superannuation is on average only 20 percent of what is needed.
“Personal Insurance and superannuation don’t always work well together. Think of it like this: insurance is an expense; superannuation is an investment.”
When Mapperson is designing insurance packages for self-employed people, he always suggests Business Expense Insurance or Business Overheads Cover. This covers up to 100 percent of the regular fixed operating expenses of your business (costs such as rent, business mortgage instalments, staff salaries and leases) if you are unable to work due to illness or injury. Business Expense Insurance can be purchased on its own or as part of a package with your Income Protection, so it doesn’t have to get overly complicated.
And then there’s Life Insurance. This is a must for small businesses, especially where there are debts associated with the business or the business owner. Fortunately, Life Insurance can be structured so that it is tax-deductible.
“Whether you are starting or growing a small business, there are many things that allow for a DIY approach, and there are others like insurance that you simply can’t afford to do yourself,” Lao reminds us.
One of the reasons for this is that there are common traps in the definitions and fine print of all insurance policies. Mapperson explains: “With Total and Permanent Disability Insurance, for example, there is the option of selecting ‘own occupation’ and ‘any occupation’. If a surgeon is insured under ‘own occupation’, they will be paid if a hand is lost in an accident leaving them unable to do surgical work. However, if the surgeon is insured under ‘any occupation’ and can still work as a GP, only a partial claim will be paid, or even no payment at all.
“This is why it’s wise to talk to a specialist personal insurance broker who can assess your situation, calculate the level of protection you need, understand the fine print and translate your options to provide you the most affordable and tailored solution. Personal Insurance brokers are independent and free to the consumer. For example, a good broker will know that some types of Needlestick Cover for the medical industry only include HIV and do not cover Hepatitis B and C.”
Getting your level of cover right and structured in a way that is tax effective could mean an extra few hundred dollars in your pocket each year. Or it could mean that your business is still running in a year’s time, should you or your business suffer some form of misfortune. In short, it means everything.