Have you got the right insurance for your business?

Author Katrina Shanks, CEO Financial Advice NZ. Article originally published in Stuff.co.nz.

OPINION: It was a close call for a coffee roastery north of Auckland recently when strong winds brought down a very old oak tree onto their building during the night. The owner said if anyone had been inside at the time they would have been seriously injured or even killed.

Not so well off was their ongoing business because, according to the owner, the repair work means it’s likely to be quite a long time before they’re up and running again.

The good news was they were able to get arborists in quickly to clear the way so builders could get in an assess the damage and get the business back on its feet, and that was thanks to the fact they had insurance.

I don’t know the details of their policy but judging by the speed with which things moved after the event, it’s clear they had the right sort of insurance for their building and the effect of the event on their business.

But not every business does, and with the meteorological experts saying we can expect more doses of the unpredictable and “unseasonal” weather events we’ve been experiencing lately as our climate changes, it’s probably a good time for to review policies to make sure they cover some of these eventualities.

For most businesses, their assets – buildings, computers, machinery, tools, stock, vehicles – are vital for their ongoing viability, so making sure they are adequately covered for weather events is vital.

There are three ways of insuring them: replacement, reinstatement (buildings only) and indemnity insurance.

Replacement insurance is where an insurance company will replace destroyed or damaged machinery with a new one or repair it so it’s as near to new as practically possible.

Most buildings have reinstatement cover which is rebuilding to the size and quality of the building which was there to begin with.

Indemnity policies are designed to put you back in the same financial position you were in before the event. Basically, you will be no better or worse off than you were before it. The payout you get is based on how much you would pay for the item second‐hand or the replacement cost of the building, less depreciation for age and the condition it’s in and how often it had been used. Indemnity is commonly used to protect inventory for a business.

The question business owners should ask themselves is, what level of return would you be happy with should you suffer a tree fall, a landslip, or a flood?

It may be prudent to take some advice on risks around this and what insurance cover you might need.

Of course, as there are many moving parts in businesses, so there are many other risks owners should look at besides assets.

It’s important to realise no single policy can cover all your business risks, so you’ll likely need more than one.

Working out what your risks are is actually pretty simple: just ask yourself what could go wrong with your business and is it covered?

Alongside having your assets covered for a climate event, is business interruption, which often follows when your premises are unusable.

Business interruption insurance will cover you against losses for an agreed period when you can’t trade but still have costs, such as wages, rent, or liability for loss of service to a client.

Such cover can help you maintain your income stream while your operation is closed.

It will cover your gross profit, wages, payroll, redundancy payments, loss of rent, additional costs of working such as reinstating records, pay for temporary premises or additional costs to source products, and meet financial obligations to the bank, shareholders and staff. It can also be extended to include suppliers, customers, and denial of access, and any other effects of the interruption – even advertising to let customers know you’ve had to move to a new address.

Liability insurance is very useful if you contract to other businesses.

This covers costs if that business sues you or one of your employees. There are several types of liability insurance, the most basic being general liability cover, which all businesses and self-employed people should have.

If your business has a vehicle, it should be covered for third party at least, comprehensive at best.

These days, no business with even one computer connected to the internet should be without insurance coverage for data breaches, website hacking, and IT scams. And make sure it contains a clause that helps you recover from a cyber attack.

Legislation does not allow you to obtain insurance for fines in relation to health and safety however you can obtain insurance for some legal costs that are involved.

One final insurance I would recommend to small business owners, particularly sole traders or where the operation relies heavily on one person, is what’s known as key person insurance. This covers the costs of suddenly losing that person and gives the business some space to recover and get back onto its feet.

Businesses of all sizes need to do their best to guard against risks. Insurance will help you do that, but you must get the right type. A golden rule is to remember no policy covers everything, and if in doubt, get professional advice.