Business Insurance 101
The Insurance Council of Australia estimates that 70 percent of underinsured and uninsured small businesses affected by a major event such as a legal claim, earthquake, fire or storm never recover.
Intelligent insurance decisions are essential to business success. The following pages outline some of the insurance issues facing business starters. No matter what your circumstances, be sure to consult a professional insurance broker or advisor who can help you to decide the best approach for insuring your business.
Identifying, Reducing & Insuring Against Risks
What are my risk reduction responsibilities?
As an employer, you are bound to a general duty of care that extends to your workers, independent contractors, customers, visitors and the public. As part of this, you must legally provide a working environment that is safe and avoids unnecessary dangers.
All businesses present risks, but you can limit the avoidable hazards in your workplace by identifying and taking steps to reduce them. The following activities should be conducted before starting a business, during its early stages and at regular intervals once it is fully operating:
- Carry out a risk assessment
- Display safety signs and directions around the workplace
- Provide access to hot and cold water, soap and hand dryers
- Ensure that toilets, kitchenettes and sanitation areas are clean
- Practise fire safety
- Implement regular cleaning routines
- Ensure employees know safe methods of lifting and conducting other physical tasks
- Oversee the timely removal of waste
- Consider employing an occupational health and safety expert
- Consider using the services of a risk assessment consultant
Steps for undertaking a risk assessmen
Developing a detailed risk assessment of your workplace can identify some of the risk areas and minimise the likelihood of employees, customers or the public being harmed through the daily activities of the business. Follow these basic steps:
1. Identify hazards
Start by listing any event, object, workplace activity or behaviour that could cause harm. These may be easy to locate, such as poorly-stacked boxes or an exposed fuse box. They may also be harder to identify, such as poor ventilation or inadequate lighting. You should distinguish between:
- Workplace hazards, e.g. the placement of a tile cutter
- Activity hazards, e.g. the potential that the blade on a tile cutter will cause injury
- Environmental hazards, e.g. the dust created by a tile cutter
To learn more about your workplace, speak to your employees. In businesses employing more than one or two people, there will usually be areas of the business that employees understand better than owners. Consult the safety guidelines accompanying your machines or equipment. These will help you identify potential dangers and directions for safe usage.
When compiling your assessment, pay attention to vulnerable groups. These may include disabled people, young children, the elderly, new and inexperienced employees or people working on their own.
If you are yet to establish your business, approach your risk assessment with the goal of limiting future dangers. Whether your business will home-based or in a large factory space, you still need to plan its layout and functions with the minimisation of risks in mind.
Remember: risk is not only the danger of someone being exposed to physical injury. You must also provide adequate rest breaks, maintain appropriate levels of training and ensure that the workplace does not place employees under undue pressure.
2. Evaluate and control risks
Once you have written a comprehensive list of risks, you need to order them according to the likelihood that each will cause harm. This allows you to deal with the most urgent dangers first and decide which areas require increased precautions. You may wish to categorise your list in terms of high, medium or low risk.
Next, take steps to reduce potential dangers in your workplace. The way you approach this stage will vary greatly depending on your type of business, though some examples of potential changes are:
- Substituting hazardous materials for less harmful ones (or lower the quantities used)
- Restricting dangerous emissions
- Limiting access to hazards
- Introducing protective equipment or clothing
- Keeping staff informed of safe practices
- Altering lighting systems
- Clearing fire escapes
- Maintaining a tidy and sanitary premises
- Keep a record of the findings and outcomes of each risk assessment you conduct. This will allow you to review your results prior to conducting future risk assessments.
Insuring against risks
When starting up a business, insurance can seem like a costly addition to an already long list of expenses. However, adequate insurance coverage plays an integral role in any risk management strategy.
Having a risk-reduction strategy in place will help keep your insurance premiums down. You can also keep your premiums to a minimum by maintaining a good record on workplace health and safety.
Property and Assets
Your business may be run from a small, home-based office with a few key pieces of equipment and an internet connection, or it may involve several sites with manufacturing, packaging and transportation equipment. Whatever form your business takes, it will require certain assets in order to operate smoothly.
Insuring fixed assets such as your products, premises, motor vehicles, manufacturing equipment and electrical goods will help you continue operating if they are damaged, stolen or destroyed due to unforeseen circumstances. Insuring your business is essential.
The following pages introduce some of the main issues to consider when insuring your business premises and assets:
Premises, contents and equipment
Looks at a basic fire insurance policy and the additional coverage you may need to cover your premises, its contents and equipment against a range of hazards. Also discusses specific insurance issues for home-based businesses.
Goods in transit
An introduction to 'goods in transit' insurance, including a definition, reasons for considering it and what is covered by this type of insurance policy.
Outlines motor vehicle insurance for businesses, the ways it differs from private vehicle insurance, the different types available to commercial operations and some important considerations for business owners.
What is public liability insurance?
Public liability insurance covers your potential liabilities to third parties for personal injury or property damage, should you or your business be found to be negligent. Statute laws impose a 'duty of care' upon certain people, including employers, owners of property and suppliers of goods. If you are found to have breached your duty of care, you may be liable for damages.
If your organisation requires your customers or the general public visit your home or business, or if you visit their premises, you should consider taking out public liability insurance. The owners and operators of organisations have a responsibility to those visiting or engaging in activities on their premises.
Public liability insurance is available to individuals, businesses and non-commercial organisations. It provides legal protection to a range of operations, including home-based businesses, shopping centres, swimming pools, carnivals and fetes or event centres. For some organisations, public liability insurance is mandatory. You should check the specific requirement of your legal structure.
Why is public liability insurance useful?
Public liability insurance will need to be considered depending on your type of business activities. Even if it's unlikely that someone will make a claim against you or your business, public liability insurance may be necessary.
Without public liability, you may find yourself unable to afford the costs associated with defending a claim or paying damages. In the event of a claim being made against you, public liability insurance will cover costs and expenses as well as any damages awarded to the injured party.
A range of public liability insurance policies are available to cover the different requirements of organisations. The costs involved in taking out a policy will depend on a range of factors including the size of your business, type of premises, the activities it conducts and the number of people it employs.
Liability and 'duty of care'
Liability can arise as the result of 'strict liability' - this is liability that is specified by a contract or required by law. Or it can arise as a breach of the 'duty of care' owed to a client or third party by the insured individual or organisation.
'Injuries' in this context refer to many things, such as bodily injury resulting from a fall, mental injury caused by humiliation or defamation or property damage occurring as a result of fire. In order to make a claim, the injured person needs to prove that a duty of care existed, that it was breached and that material damage was caused by the breach.
To reduce the chances of a claim being made against you, it is important to take steps to identify and manage any risks within your organisation.
Who can help?
An insurance broker can assist you with further information on the different policies relevant to your operation. Each business will have different requirements, so it is important to seek the advice of qualified professionals with experience in the area of public liability insurance.
Alternatively, you can go directly to an insurance company. They will be able to tell you what cost and type of cover they are prepared to provide, given your particular circumstances. Importantly, insurance brokers act as your representatives and work in your interests, whereas insurance agents may act in the insurance company's interest.
What is professional indemnity insurance?
Professional indemnity insurance protects professionals against claims of negligence made against them by a client. This type of insurance is available to professionals across a range of industries and covers the costs and expenses of defending a legal claim, as well as any damages payable.
Professionals are legally held to a higher degree of skill and care than ordinary people. If others suffer a loss that can be attributed to a specialist's failure to uphold professional standards, they risk being sued for a breach of professional duty. A client's loss may be material, financial or physical.
Who does it affect?
The definition of 'professional' has broadened in recent years. Due to this, professional indemnity insurance is now held by workers across a wide range of industries. Any professional person providing services is regarded by their client as an expert and is therefore open to a claim being made against them.
Professional liability insurance was once associated mainly with such groups as accountants, solicitors, medical workers and engineers. Currently however, it provides protection for advice and treatment provided by professionals in many industries, including architects and designers, education workers, real estate agents, health workers and consultants.
Although generally a voluntary form of insurance, certain professionals, including insurance brokers, legal professionals, medical practitioners and some accountants, are required to hold professional liability insurance. Professional contractors often need to hold professional indemnity insurance if working with government bodies, local authorities or private consulting firms.
The professional indemnity policies and conditions relevant to you will vary widely depending on your industry. For further information on the professional indemnity issues that affect you, contact the relevant industry body or an experienced insurance broker.
Why is it useful?
Losing a claim against you can result in enormous costs and expenses. Some claims take more than five years to settle, leaving a large bill for court costs and legal expenses. Even when successful, defending a claim can be costly.
Who can help?
Professional indemnity is a complex and specialised area of insurance. If you want to know more about the professional indemnity policies and conditions relevant to your profession, you should contact an insurance broker with experience in this area.
Another option is to deal directly with an insurance company. However, remember that an insurance broker's role is to act as your representative and work in your interests, while insurance agents may act in their company's interest.
As claims are often made long after the event to which they refer, if you plan to retire, close your business or change insurers, you should take steps to arrange for 'run-off cover' to keep you protected against future claims.
Protecting your revenue
Loss of revenue insurance can help you cover the expenses of rent and other overheads while you get your business fully operating after a catastrophic event such as fire, flood, accident, burglary or serious computer failure.
What does it cover?
Loss of revenue insurance is intended to compensate a business for any reduction in profits occurring due to business interruption. This kind of insurance is additional to basic property insurance, but for revenue losses to be covered, they must be seen as a direct result of the type of property damage covered by your policy.
Revenue insurance is also called 'consequential loss' or 'business interruption' insurance and helps ensure that:
- Anticipated net profit is maintained
- Continuing overheads are paid
- Key employee wages are paid
- In some cases, additional working costs may also be covered
Is it suitable for my business?
Every business involves different risks and requirements. The specific circumstances of your operation must be carefully evaluated before choosing an insurance policy. Many insurance agencies offer packaged policies suited to particular business types. You may find it useful to engage the services of an insurance broker, who can shop around for a packaged policy specifically suited to your operation.
Am I required to take out WorkCover insurance?
If you engage employees or contractors deemed to be workers and you pay, or expect to pay, more than $7,500 a year in rateable remuneration or if you engage apprentices or trainees, you must take out a WorkCover Insurance policy.
This applies to you even if you are a small company, partnership or sole trader with only one or a small number of workers.
WorkCover insurance, setting up a safe workplace and fixing workplace hazards.
How can I make my workplace safer?
There are many things you can do as an employer to increase safety levels in your workplace. To begin, make a detailed list of all the potential hazards in your workplace. Assess these risks and formulate methods for controlling, reducing or removing them.
Some businesses employ a qualified Occupational Health and Safety staff member. For smaller operations, it may be more viable to have a staff member trained in this area. This form of training will help your staff carry out their work safely and learn how to take control in an emergency.
When inspecting your workplace, you may consider seeking the services of a qualified health and safety consultant. Don't forget to consult your employees: they are a valuable resource and can provide useful information about the risks within your workplace.
Insurance Brokers & Service Providers
Business insurance is a complex area that can be very confusing: a huge range of policies are available, covering the needs of businesses across all industries.
When considering your insurance options, carefully consider a policy that serves the specific needs of your business. Although insurance is important, many businesses either operate with no insurance or are incorrectly insured. Getting professional advice will help make your options clearer and guide you to the most suitable policy.
Why use an insurance broker?
An insurance broker is a good first stop. It is an insurance broker's job to find a policy that suits your business needs. Insurance brokers are also required by law to work as your representative, with your interests in mind at all times.
A broker will contribute valuable skills and industry experience to the process of selecting an insurance policy. They will operate most usefully if they are aware of the details and risks involved in your current operation, as well as your intentions for future growth and expansion.
If your business is classed as a hazardous risk, you may find it difficult to find an insurance company that is willing to insure you. Insurance brokers can accurately assess the risks of your business and help facilitate the process of securing insurance.
All insurance brokers are legally required to hold a valid registration with the Australian Securities and Investments Commission (ASIC). They must either hold an Australian financial services licence or be employed by someone who does.
How do I find a suitable broker?
Insurance brokers have different areas of expertise: some will specialise in life insurance, others in motor vehicles. You should find a broker who has experience with businesses similar to yours and make certain they understand the insurance requirements of your industry.
A telephone directory will give you access to working brokers and advisers in your area. If you want to search for a broker according to more specific characteristics, the internet is a good place to start. Some industry associations, including the National Insurance Brokers Association of Australia (NIBA) and the Insurance Brokers Network of Australia (IBNA), offer search functions on their websites that allow you to find an insurance broker based on location as well as through areas of specialisation.
You may also choose to go directly to an insurance company. The Insurance Council of Australia website provides insurance information to consumers and business operators, as well as the contact details for its 56 member groups.
Insurance companies are licensed under the Insurance Act 1973 and are supervised by the Commonwealth Insurance Commissioner. Other legislation protecting consumers is the Insurance Contracts Act 1984 and the Insurance Agents and Brokers Act 1984.
An insurance ombudsman service also exists to help resolve conflicts between insurers and the insured. The existence of these services and legislation will allow you to purchase insurance through an insurance company or intermediaries with confidence.
In addition to the advice of a broker, adviser or insurance agent, you may wish to consult an accountant or tax agent for further advice on insurance issues.