Insurance for a business? Pay now, save later
Depending on what you do, getting insurance for a business can result in some eye-watering costs. But being insured is absolutely worth it for the peace of mind, writes Ailsa Page.
When you first start out in business you might be thinking is business insurance necessary? The answer is yes.
Firstly, there are so many things that you don’t know you don’t know in business. And this list of unknowns only grows the longer you’re in business.
If you’re serious about running a successful business, then you have got to take the good with the bad.
Yes, insurance is a grudge purchase that’s for sure – nobody likes paying for something you can’t see or fully understand the benefit of.
Protection for the future when there are urgent things to spend on in the present can be challenging.
But (and the sugar coating stops here), you better get used to it if you’re running a business.
What types of insurance are there?
The reality is, just as much as you want to be making profits through running a business, you also need to protect the hard work you’ve put in and the assets you’ve purchased or created.
In fact, there are lots of things to protect in business and the specifics of what insurances and how much to insure for will be individual to each business.
The main categories of things businesses tend to have insured are:
- Your property and equipment
- Your people
- Your customers
- Your operations
- Future costs
Choosing what to insure and how much to insure them for depends on how much you are prepared to risk and how much of an impact the worst-case scenario might have on your ability to continue in business.
Another consideration is whether you have a choice about getting particular insurance.
For example, when I owned a retail store, one of the commercial lease requirements was that we had to have the front window insured.
Certain clients may require minimum insurance levels, particularly if you’re subcontracting or going for government tenders.
They may stipulate a minimum requirement for public liability or professional indemnity.
The decision making around whether to get that insurance can be as simple as ‘Do I want to apply for this type of work?’ In this sense, you can think of insurance as part of your setup or marketing costs.
The main types of insurance that businesses take out are:
- Income protection
- Personal injury
- Director’s insurance
- Professional indemnity
For your staff
- Workers’ compensation insurance (such as WorkCover)
- Theft insurance (theft can often occur with staff as much as the public)
For your business
- Theft or damage
- Business disruption
For your customers
- Public liability
- Product insurance
For your property
- Shop windows
- Equipment (computers, machinery)
- Work vehicles
- Your reputation
For tax purposes
- Audit insurance
When should I get insurance?
The answer is, usually, upon commencement of your business, particularly if you need insurances to operate legally.
Insurance should protect you against the worst-case scenario with the assumption that without the insurance you wouldn’t be able to cover the costs.
It’s always helpful to get professional advice from a business advisor, accountant or insurance broker if you’re unsure.
How much should I insure for?
Tempting as it may be, do not underestimate the replacement amount to save on premiums. This ultimately jeopardises the whole point of protection in the first place.
If your factory burns down and you didn’t insure it for the real cost to rebuild it, you may find you end up out of pocket for the difference (or unable to rebuild entirely).
Some insurances, such as WorkCover, are determined by the agency depending on the information you have provided.
If you haven’t provided true and accurate information, then this may jeopardise any claim you make, so it’s important to be as accurate and honest as possible. This is a good argument for using online accounting software from the get-go, as it will allow you to capture and track all your expenditures and provide record of them from any device, anywhere (cloud-based data can’t go up in flames).
Insurance plays a different role throughout the life of your business, so consider reviewing all insurances on an annual basis.
Where can I get business insurance?
Some businesses organise their business insurances directly with insurance companies, through their bank, accountant or financial planner.
Another option is to consider an insurance broker who can not only provide expert information regarding what insurances you may need they can also shop around to get a good deal for you.
Some insurances such as professional indemnity insurance may be included in membership fees with professional industry organisations so it’s worth checking your membership benefits.
How much does business insurance cost?
Like any insurance, your costs depend on the level of risk to whatever you’re protecting and the amount you’re insuring it for. As a result, costs vary significantly on a case-by-case basis.
As with domestic insurance, you may have the option to pay monthly, quarterly or annually, so see if you can negotiate the terms that best suit your cash flow.
But the most important question to ask yourself is, what are you prepared to risk?
I like to apply this thinking when considering audit insurance.
I look at the maximum it would cost in accounting fees (worst-case scenario) and then think, ‘Is that something I am prepared to pay and can I afford to pay it?’ If the answer is ‘No, I can’t pay,’ then it’s worth considering insurance.
Insurance is a necessary part of being in business.
If you’re working hard to build wealth, assets and financial security, then it make sense to protect your investments.
If you’re not sure which insurances are important for your business, the quickest way to find out is to seek out a business insurance broker – they may become your new business best friend!