The 6 common mistakes when taking out business insurance
You’re the expert in your business, the one who knows every in and out and nook and cranny. Chances are you’ve put a whole lot of yourself into it, and you’d do anything to protect that. Right?
So what happens if that worse-case scenario actually happens? The last thing you need is a denied claim, a reduced settlement, or *shudder* to remember you’ve got no protection at all.
It might be just that you don’t understand how insurance works or the benefits to your business , or you might just be trying to save some money , or maybe even avoid that cost all together …
Either way, unintentionally or not, it’s just not worth short-changing yourself when it comes to protecting your livelihood.
So here are the 6 most common mistakes to avoid next time you’re taking out business insurance;
1. Not taking insurance out at all
Approximately 25% of Australian businesses have NO insurance at all. That’s 1 out of every 4 businesses you deal with that are not protected at all.
It’s a sobering thought and there are absolutely a variety of reasons business owners have for not insuring, but it often indicates a lack of understanding of the potential impact to their business of not having any insurance.
Understandably businesses might be trying to save on their outgoings; yes insurance is sometimes expensive - we pay it year in, year out without ever having to use it. It’s an intangible, almost ephemeral concept that unless you experience a claim, is difficult to justify as an ongoing expense when the business belt is already tight.
But even some of the mildest of occupations, like office-based consultants for example, have some level of public liability exposure that needs to be covered off.
At the very least every business should be taking out a public liability policy to protect them against the third-party property and injury exposures of running a business.
2. Cheap is not always better
The most common type of business insurance in Australia is found under a Business Pack. It’s a multi-section policy that covers most business activities, meaning you can package up those must-have insurances like public liability, with covers for your property and events like theft and interruption.
While you might be quoting the same sums insured and sections, every insurance policy out there is different. Just like the features on a luxury car versus a paddock-bomb, you’re not getting the same bells and whistles when you’re going for the cheapest car on the lot.
As much as we might like, we don’t get a Mercedes-Benz for the price of a Ford Fiesta – it’s the same with business insurance.
There are SO many differences between policies and even insurance companies. From definitions and underwriting approach to limits of cover and standard inclusions, to rating a risk differently as they consider different underwriting information or weigh its importance differently. Even the disclosure requirements between insurers can be different!
That’s a lot of differences!
Don’t get me wrong, a cheaper policy is not a bad thing and finding savings on an expense that you don’t ever have to use, makes perfect sense. Just keep in mind you’re paying for what you get and those bells and whistles, higher sub-limits, or that broader definition can be the biggest difference between a crappy claim outcome or an outstanding outcome.
3. Reducing your sums insured to reduce your premium
A really tempting option when you’re DIYing your insurances is to drop your sums insured to scrape some premium off. While this might seem like a good idea at the time, there is a concept in insurance-land called Under Insurance.
It’s exactly what it sounds like – you’re under insured and not covering the true replacement value of your stock, equipment or buildings. Approximately 70-80% of businesses are under-insured and half of Victorian homes in 2017 were underinsured for serious events like floods, bushfires and storm claims . That’s a really scary statistic!
If you’re considering reducing your sums insured to save on premium, the evidence shows the cost to you if a claim occurs and there’s not enough to repair or replace your property, is going to far outweigh the potential savings you made on your premium that year.
Some insurers also apply a co-insurance clause in their policies which states if you are underinsured at the time of a loss, they will only pay a portion of the actual cost of repair. This can leave business owners significantly out of pocket if a claim occurs.
Could you cover the short-fall if your policy has a co-insurance clause and you’re left with 20% or more of the reinstatement costs?
4. Not understanding the cover or reading your PDS
Your Product Disclosure Statement is a Very Important Document. It tells you everything you need to know about your policy, the insurance company, what they’re covering you for and NOT covering you for, how to dispute a decision or make a complaint, and equally as important, what your obligations as an Insured under the policy, are.
It is always recommended to read the PDS through, but I’m realistic enough to accept only true insurance nerds, and anyone with a legal background is inclined to go this far. For those adventurous souls wanting to get their heads around a PDS , you can learn How to Review Your PDS in 10 Minutes here.
But if you’re short on time , there are a few key sections you should check out and you can leave the rest till you have a problem;
- The coverage section – the bit that tells you what you ARE and, ARE NOT covered for.
- The sub-limits of cover section – where they tell you about how much they’ll pay for certain things, like jewellery items, art work and collections for example.
- The exclusions – the bit that tells you explicitly what isn’t covered. Sometimes this can be grouped with the coverage section which makes it easier, but usually it’s a separate section, and often there will be policy exclusions and general exclusions. Just do a quick Ctrl+F and search “exclusions” and you’re set.
And it goes without saying, if you come across something NQR, pick up the phone and call the insurer real quick. A 5 minute call to clarify something could be the difference between thinking you were covered for something, and finding out you aren’t .
5. Not getting alternate quotes
Insurance policies are all different, even if they do the “same thing”. Every insurer has a different approach, prices risk differently and has different levels and sub-limits of cover, and offers different benefits and features, amongst lots of other little things.
While it may be more appealing to poke your eyes out with tooth-picks, getting at least 2 other quotes is good practice, and if your existing insurer is still good on price and coverage, you’ve got some peace of mind that you’re on a good wicket.
Just keep in mind that there will always be differences in the fine print . If it’s waaaay cheaper, there’s probably something that insurer is not including, that your current insurer is. A.K.A a difference.
Fun fact: sourcing alternate quotes and comparing covers is a key part of an insurance brokers role
6. Not reviewing your covers and needs each year
I get that insurance is not that thing you do for fun. It’s stressful and boring in equal measure and that my friends, is never a good combo.
But it is that thing you need to go over, every year, to make sure you’re covered right and not leaving yourself exposed.
No business is static over the course of the year. You make more money than the last year. You’ve got more staff. You’ve added new assets, upgraded that machinery, sold those old freezers in the back, you’re offering new services and products to your customers, and a recycling plant just moved into the factory next door.
There are lots of considerations that go into your premium and the cover your business needs, so reviewing your policy each year is a must to make sure you’re covering everything right and there are no nasty surprises if a claim occurs.
So there you have it.
Some of the most common mistakes seen on the regular that business owners are making when taking out their business insurance. This is not a finger-pointing exercise, rather a chance to spot-light even simple things, like not understanding what you’re actually covered for, or the importance of actually having insurance which make all the difference in properly protecting your most valuable asset – your business.
This article originally appeared on MeyerInsure Blog and has been published here with permission.
Advisr does not provide advice and does not hold a financial service license (AFSL). All information above has been provided by Laura Meyer.