Every business has to deal with risk on a daily basis, regardless of size and industry type. Rob Murphy looks at how, with the appropriate insurance, you can manage some of the risks facing your business.

Risk management should ensure systems are in place, and well maintained, to ensure that decisions are well thought through, and that internal systems provide legal compliance and reduce the risk of fraud or injury, while understanding and protecting the business core assets. However, all systems are imperfect and the fall-back position that protects business viability is having appropriate insurance. Having the appropriate insurance is essential to managing risk, but my travels and discussions with many SMEs lead me to believe that it is a neglected area, an area that directors have limited knowledge of and often buy a least painful option to meet legal requirements.

A rarely published statistic is that up to 80% of assets will change hands over the next 15 years or so as the baby boomer population retires. For most SMEs a business is the family’s chief asset, but few take the steps to manage risk adequately or develop a cohesive exit plan. While succession/exit planning is out of scope here, it’s worth familiarising yourself with the main insurance types that may provide protection. Independent professional advice should be sought to match insurance needs with individual business circumstances.

Compulsory insurance

Compulsory insurance for Australian businesses includes:

  • Workers’ compensation – if you employ people (through an approved insurer for your state).
  • Third-party personal injury – if you own a motor vehicle.
  • Public liability – for certain types of businesses, e.g. trades such as electrical and plumbing contractors. The minimum level of cover in Australia is $5m.

Workers’ compensation will not cover YOU if you are self-employed; you will require accident and illness insurance through a private insurer. If you are classed as an independent contractor you may also require your own accident or illness insurance.

Non-compulsory insurance

Various types of insurance are not compulsory, but a business should consider insuring assets, revenue and liabilities as protection against potential risks. As a general rule your business activities will determine the types of insurance you require. For example, is your business factory/office based online or home based? Do you sell products or services? Do you employ people? Are you a sole trader or a company director? This is an important distinction from a liability perspective, you may be liable if liquidity becomes an issue or a law is broken.

Asset protection

One of the key assets of your business is YOU, so personal risk insurance should be a consideration for most business owners especially those who have dependants. The common known insurances are:

  • Income protection insurance – covers part of your income if you can’t work due to illness or accident.
  • Trauma insurance – provides a lump sum payment if diagnosed with a specified life threatening illness.
  • Life insurance – provides a lump sum or series of payments to your partner/dependants if you die.
  • Total and permanent disability insurance – provides a lump sum payment if you are totally and permanently disabled prior to retirement.

Other insurance types include:

  • Motor vehicle.
  • Building and contents.
  • Stock deterioration.
  • Fire and defined events.
  • Goods in transit.
  • Property in transit, e.g. tools of trade.
  • Machinery breakdown.
  • Accidental glass breakage.

Revenue protection

  • Business interruption or loss of profits.
  • Business key person cover – provides a lump sum payment to cover the revenue of the key person if they die or are unable to work.
  • Employee dishonesty and fraud.
  • Money in transit/safe/office.
  • Tax audit – covers fees for tax audit or investigation.

Liabilities protection

As a business owner and/or director you may be liable for damages or injuries to another person or property. Although mostly optional, liability insurance cannot be ignored.  Types of liability insurance include:

  • Public liability – protects the business if found liable for negligence.
  • Professional indemnity – protects professionals against liability such as breach of contract or mistakes during service provision. It can be industry-specific.
  • Product liability – if you sell, supply or deliver goods, this protects against injury, death, damage etc. as a result of product failure.
  • Management liability – against legal liability in connection with management of the company.

Do you run your business from home? If you do, then be aware that your existing homeowner policy may not cover you – or your clients and staff – in the event of an accident. Many policies don’t cover tools of trade, office furniture and computer equipment used for business unless this has been agreed with the insurer. It pays to read the product disclosure statement (PDS) or check with the insurer to ensure you have the right areas covered. The definition of certain terms such as flood, disasters and terrorism may vary among insurers; NEVER assume.

Good advice is essential. You can go directly to an insurer or you can seek assistance from a broker who may deal with a variety of insurers and have knowledge of a wide range of policies. Policies can also be ‘bundled’ to suit your specific business needs. It pays to be informed.

Rob Murphy is a Business Adviser with the Commonwealth Government’s Entrepreneurs’ Programme (EP). AMTIL is a partner organisation working with the Department of Industry in the delivery of the EP.