All you ever wanted to know about business insurance but were just too busy to ask!

The Christchurch earthquakes not only dramatically altered the lives and businesses of the city’s residents; they significantly impacted on insurance companies and, more importantly, the policies they now provide. Almost three years after that first big 7.1 magnitude quake struck.
Here insurance providers identify the five most important facts owner managers must know when reviewing each category of insurance.

ASSET PROTECTION
Garry Bray, executive director at Marsh, believes this form of insurance is very important “especially so when times are tough and the insurance market is constantly changing”. His advice? Focus on the key elements of your cover and ask the right questions of your insurance broker.

1. Establish the correct sum insured and basis of cover for your building and contents.
“Miscalculating the cost to replace building, stock, plant and equipment is a reasonably common mistake when it comes to arranging insurance.
“Make sure your assets are accurately valued by a reputable valuer, on an annual basis, and do regular stocktakes. Reinstatement building cover can allow you to rebuild on an alternative site.
“If you’ve insured a property for $100,000, but the value of the property lost is assessed to be, say, $150,000, you only receive $100,000. Find out from your landlord what insurance coverage they have; is it for replacement-value rather than indemnity value?”

2. The condition and location of your building.
“Insurers have tightened up on the property risks they will cover, e.g. restrictions for insuring buildings constructed prior to 1936 and 1976 – and those in higher earthquake regions, such as Wellington and Christchurch.”
On renewing your insurance policy, these are some of the details you must provide: age built, materials, coordinates, storeys, building CC, soil condition, structural engineering reports (New Building Standard).

3. Security and loss prevention.
“Having solid security and loss prevention measures (sprinklers and extinguishers), will help to protect your business assets, and improve the availability and affordability of your cover. A criminal act, like theft/vandalism, can cause significant costs for a SME, as can a fire.”

4. An accurate description of your business.
“Insurers are requiring more detailed information on the assets and operation of your business. What it does and its size are key factors determining price and scope of cover. Conducting a thorough review of your business risks, with your broker, at the time of renewal will help.”

5. Business interruption.
“The Marsh 2012 Survey of Risk showed the number one risk for SMEs was ‘disruption to your business’, compounded by underestimating/insuring the indemnity period. The length of your indemnity period needs careful consideration: 12 months is an indemnity period selected by many people. But a third said 12 months was inadequate and 16.7 percent were unsure.”

Because this is such a fundamentally important part of ensuring adequate asset cover, we also asked Stephen Everett, GM commercial underwriting and risk management, NZI for his advice, particularly in light of the fact that many SMEs are home-based:

1. Understand your cover.
“Most Home and Contents policies are not designed to cover businesses; don’t assume that if you have a home-based business, these policies will automatically cover your stock and equipment. Read your policy and talk to your broker to ensure you get the right cover in place.”

2. Ensure it’s adequate.  
“You can’t buy more cover after an event; the best insurance is enough insurance. In severe losses the difference between keeping your business alive and having to close is having enough cover to both replace your physical property and maintain your profit levels.
“Trying to save a few dollars a year on a premium will seem insignificant if you have to top-up the costs of getting back on your feet because you were under-insured.”

3. Take precautions.
Everett points out ‘fire’ constitutes 55 percent of NZI’s property claims, outside of those caused by natural disasters. “Commercial property fires are most commonly caused by combustible material stored adjacent to buildings and electrical faults. Skip bins and other material such as old pallets and waste are frequently targets for opportunist vandals, who may not consider how easily a fire will spread to the building.”
“To mitigate the risk of electrical faults or faulty wiring, ensure all electrical installations are regularly inspected by a registered electrical inspector – particularly as they get older.”

4. Give yourself the best chance.
Astonishingly, 80 percent of property fires are controlled with a single fire extinguisher.
“Accordingly, it’s important you have the appropriate extinguishers for the kind of fire you might experience, and your staff know where they are and how to use them. Mount extinguishers near the most likely exit route, and service them annually.”

5. Actively manage your risk.
“Often basic measures are the difference between a small event and a catastrophic loss to your business. “Basic steps such as backing-up your data offsite and implementing a BCP (Business Continuity Plan) help reduce the severity of a loss and allow your business to get up and running in the shortest time.”

GENERAL LIABILITY COVER
If you want to protect yourself from any potential legal liability exposure, which could cause financial hardship, Michael Dunning, manager of business insurance at Vero, offers guidance and some excellent examples:

1. Make sure your limit of liability is adequate and reflects any past/current contractual obligations.
“Contractual obligations often stipulate a minimum limit of indemnity for Public Liability Insurance. Your broker must review current/past contracts to establish a suitable limit of indemnity, and ensure that you are not in breach.”
Example: You sell/manufacture a product. Think about the liabilities associated with the product in a worst-case scenario, and plan for the unlikely (but extremely expensive) events which could seriously damage you/your business financially.

2. Be clear about what you do.
Your business description must be correct and accurately reflect current/past activities, services and products.
You must tell your insurer about any changes in your business activity, especially at renewal. If you don’t, any claim arising from that may not be covered.”
Example: You’ve recorded you sell components for washing machines, but you start making components for hospital equipment. The liabilities associated with those products are vastly different.
“Where your products are being sold is also important, especially if your distribution extends to beyond New Zealand. Exporting to Fiji versus America would attract different liabilities regimes, penalties, as well as costs to investigate and defend if a claim is made.”

3. Don’t sign away your rights without advice.
“‘Hold harmless’ generally refers to a clause in the contract waiving your rights to sue someone if they are culpable of any wrongdoing.”
Example: If you undertake contract work in an external worksite and the contract requires you to waive any rights against the principal (‘hold them harmless’), then you could be taking on liabilities of the principal. This could potentially leave you exposed, if your insurer hasn’t (or won’t) accepted this increase in liability exposure. Discuss with your broker in every case.

4. The policy must be in force at the time.
“Too many lose sight of this fact. Sometimes an injury or the damage (which gives rise to a claim), may occur months/years after the work was done, or the product was supplied.
“So even if you stop trading, consider carefully whether you should keep run-off liability cover in place.”  
Example: You do electrical work in 2009, then cease trading shortly after and terminate insurance cover.
Two years later, the building burns down and the cause of the fire is shown to be your company’s electrical work in 2009.
5. It’s a specialist area, use a broker.
Your broker can research, recommend and tailor cover to your specific needs.

HEALTH COVER
Peter Tynan, CEO, Southern Cross Health Society, addresses ways of enhancing and securing ‘human assets’ proactively, through health insurance.

1. It addresses business continuity.
“SMEs are even more heavily reliant on key staff than larger enterprises and are especially vulnerable if they are away for extended periods. Referrals to busy specialists, queues for tests and waiting on a public list for surgery for months can have a serious impact on a business.
“Health insurance provides faster access to qualifying medical treatment, which can be scheduled to minimise disruption at work. Employees may be less likely to delay seeking diagnosis and treatment, which can help prevent long-term sickness and longer recuperation periods.”

2. It’s a useful recruitment tool.
Attracting and retaining the best people are crucial to business success. Research indicates a subsidised health insurance scheme is one of the key factors employees look for when assessing potential employers.
“A 2012 TNS survey for Southern Cross showed that as a recruitment tool it rated above car parks and recommendations from friends and family. The same survey showed, on average, employees with subsidised health insurance rated their employee satisfaction at 71 percent versus 66 percent for those without.”

3. Think long-term.
“Shop around for an insurance provider which meets the business’ needs of today – and tomorrow. Consider their financial stability and long-term sustainability.
“Ask what they pay in claims versus premiums. Some insurers, for example, pay out around 60 cents for every dollar of revenue they receive, while other not-for-profit funders pay in excess of 80 cents.”

4. Flexible for your business.
“There’s a common misconception health insurance is unaffordable for SMEs. There’s no one-size-fits-all health insurance policy, but rather a selection of offerings depending on what level of coverage is required/can be afforded.
“These range from plans providing extensive cover for surgical consultations, imaging and tests, as well as day-to-day-healthcare. Other plans include co-payment policies, offering lower premiums with the policy holder paying a contribution towards costs.

5. Insuring the future workforce
“Statistics NZ records the proportion of New Zealand’s labour force aged 55 years continues to grow and is expected to be around one-in-four by 2020.
“That’s going to have a significant impact on the workforce. A Victoria University study showed the top influencer on the decision to retire was poor health, closely followed by the health of family members. Employers who look after the health of their workforce and their families today will reap rewards over coming years.”

HUMAN CAPITAL RISK
Triplejump GM, Kerry Forde says: “Unexpected events affecting the key people in a business can cause a chain of outcomes radically changing a business for the worst.”  

1. Be conscious of Human Capital Risk (HCR).
“The impact from unexpected events can be foreseen and the probability of a human capital event occurring is high, relative to other business risks.”
At least one in five businesses could have to be wound up following the death or serious disablement of a key person, says the NZ Centre for SME Research. New Zealand Mortality and Morbidity tables show the probability of a premature death in a business unit of three people (the average age is 45) before age 65 is a 48 percent probability of one death. And of a disability lasting six months or longer, of the same unit? – a 29 percent probability of one disability.

2. Identify and quantify the risk.
“Ask yourself what the impact of losing important people could be on your business? Where will the effect be most significant and what will it cost if you have done nothing to protect it?
What is the potential flow-on effect, internally and externally, to the business, including the potential effects to your personal income and your assets?
“Which risks have the biggest impact?
The initial impact might not be considered significant, but when all related effects are included, the issue can become major. You need an in-depth understanding and analysis of your business to quantify the issues to enable sound risk planning.”

3. Understand your capacity to manage HCR
“Plan to manage the risks you can. Identify those risks and develop internal strategies to manage low-impact events. For major events, work out what can be handled with the business’s own resources and transfer the risks you cannot manage to a third-party (e.g. insurance).
“Work with your advisers to build resilience into your business to mitigate and manage risk internally; by reducing your business’ dependence on a key staff member; documenting your processes; improving supplier/provider agreements; and succession planning.

4. HCR is a Living Business Management Issue
“Businesses change from year-to-year; key staff move on, levels of debt can vary as can running costs and profit. When these change, it can affect your capacity to manage HCR.  
“It is essential to review your risk plan annually or when substantial changes occur in your business or personal life, to ensure you identify how you may need to adapt your risk plan to respond.”

5. HCR is complex and a potential business liquidator
“HCR spans all aspects of your business and impacts key areas such as ownership, business liabilities, succession planning and personal income. It requires specialist expert advice and support centric to your needs.  
“A comprehensive risk management plan involves collaborative advice with your accountant, lawyer and risk adviser. The process does not need to be onerous but the benefits can be substantial.”

Kevin Kevany is an Auckland-based freelance writer.
Email [email protected]
Websites to visit:
www.marsh.co.nz
www.nzi.co.nz
www.qbe.co.nz
www.southerncross.co.nz
www.triplejump.co.nz
www.vero.co.nz

The how and why of business continuity plans

On the subject of business continuity plans, get those people who best understand the business together to imagine various scenarios, advises Val Graham, marketing and communications manager, at QBE. And have them consider: likely seriously disruptive risks; what could put you out of business, temporarily or permanently; how to mitigate this; check insurance protection is adequate; and get professional help from a broker.
“Assume there’s a serious disruption at your premises, such as a fire. Firstly, there are the costs of putting right any damage, with repairs to the premises and replacement of equipment – plus ‘other costs’ which may not be immediately apparent.  Let’s cover the more obvious ones first.”

Repairs to the business premises.
“Repairs may be major or cosmetic. Minor repairs and a bit of redecoration means the interruption effect may be minimal. Where major repairs are involved, the preparatory work can be a major distraction and a business time-waster, taking months. This could be compounded if you are part of a major disaster, earthquake, flood, etc. Build this into your calculations.”
From a business interruption insurance perspective, while most indemnity periods are for 12-months, the Christchurch earthquake ‘wider damage impact’ demonstrates this period was insufficient for many businesses, to their financial detriment.

Replacement stock, plant and machinery.
“In your planning, allow for the sourcing and supply of new stock, plant and equipment in as far as: availability; timescales; how realistic the asset sums insured are. Don’t underestimate – the consequences may be financial hardship.  
“If you have other people’s property on your premises, you may also have to factor in some insurance cover for any loss/damage to that.

Mind the gap.
“Short-term you have to find somewhere to work from. For an SME, a spare bedroom or the garage might do. It poses greater difficulty for larger and/or manufacturing businesses.
Who will look after your customers in the interim? Will they come back to you afterwards?
What will happen to your staff?
“Short-term this might even involve an arrangement with a competitor as an alternative supplier, producing extra product to your specification. That will almost certainly mean a reduced margin for your business.
“Obviously, many customers may not return when you re-open, having found alternate suppliers. You may have increased marketing costs to let customers know you are back operating, and to entice them back.
“You may also lose some key staff. Even if you have business interruption insurance, you need to ensure your policy also provides for your payroll costs. With some policies this is an added option, and you may not be able to afford to retain key skills within your business without it.”  

Documentation to support your claims.
“You will need to provide some historical evidence of your trading records, including income and expenditure – sales, materials, gross profit, and overheads.  Consider the impact of seasonality and business/economic trends on your business.
“Bank statements will be available from your bank. It is sensible to keep robust ‘other records’ off-site. These will be vital in verifying your trading history and costs.”