When a business is first set up, insurance is usually on the radar screen. If you are doing business from rented premises, for example, your landlord will almost certainly require you to have public liability insurance.
Some kinds of insurance are compulsory. If you employ someone, you must have workers compensation insurance. In other cases, you have to make a choice about whether to buy insurance or not. For a small business starting up from scratch with a limited budget, buying insurance that may never be claimed on may seem like an unnecessary luxury. If being under- insured is courting disaster, being over-insured seems like a waste of good money.
How do we decide what insurance to get and not get?
Good question, I called an expert to find out. Wayne Holt of Unity Insurance Brokers, who sells insurance products to business owners, explains how he helps business people choose what types of insurance to buy. The first step, according to Wayne, is to map out the risks that the business has. Wayne says: “In any venture, whatever it is, there is always some risk associated, and you work out what risk you can absorb and what you need to pass on by getting insurance. What the insurance does is put finance to your risk management plan.”
After working out what the risks are, and planning how you will deal with them (absorb or insure), you can then go on to choose insurance products that best suit your needs and budget.
Let’s look at a hypothetical example and apply this strategy.
Say a person – let’s call him “Marcus” – wants to start a new business selling ice cream from a van. What are the risks associated with this business? To put it another way, what things will cost him serious money, time and trouble if they go wrong? If they do go wrong, can he afford to fix those problems himself or not?
A list of the risks that Marcus is taking will look like this: Marcus could get sick and be unable to work and service his loans and debts; his van could break down and need repairs, or the equipment in the van, and he will lose income while the repairs are being made; his stock of ice cream could become spoiled, or be delivered to him in a defective condition; he might serve ice cream to customers that makes them sick; his van, or items in his van, including personal belongings, might be stolen; he might crash his van and injure other people or their property.
These seem fairly obvious.
There are other, less obvious risks that could also cost him dearly. For example: he could be audited by the taxation office and lose work time while he assists the auditors; the State or local councils might ban sales of ice cream from vans; his sophisticated computerised ice cream inventory and ordering system might stop working; he might be given a dud cheque for a large order; he might be defamed by a rival ice cream seller and lose customers and sales.
All of these risks can be insured against, and more. Clearly, Marcus needs to draw up a list of priorities. Defamation insurance is probably not as vital, for an ice cream seller, as insuring the van against theft. If he was a television personality, maybe the situation would be different. Marcus might also think about alternatives to insurance, like risk control. If he is worried about the van being stolen, maybe he could install an alarm? Or buy a guard dog to watch it at night?
Then what?
Once Marcus has mapped out his business risks and decided how to deal with them, he can select insurance products that fit his needs. Insurance companies have become more competitive and creative over time, and have developed packages of insurance cover that are designed to suit the needs to people in particular industries, for example retailers, or trades people.
From the legal point of view, not having insurance to back up your liabilities is usually a big mistake. We all accept some degree of tortious liability – a “duty of care” – in most of our transactions with other people. If we make a contract, that contract will usually include warranties, including, unavoidably, warranties implied by the law. This is another layer of liability. Buying insurance creates a pot of money that becomes available in the event that the worst happens and someone claims against us.
To conclude.
Our friendly insurance broker Wayne Holt has these words of advice for those of us who are wrestling with the question of what insurance to buy:
“Beware – all insurance policies are not created equal! There can be conditions and exclusions which vary markedly from insurer to insurer and policy to policy. It pays to get expert advice from a qualified industry professional, if you are unsure of the insurance you are buying.”
