When starting a business there are a number of questions that you find yourself answering, one being “what insurance do you need to start a small business?”. The actual answer to that question is technically none, unless you have a specific contractor or industry body that requires you to hold a specific insurance before allowing you to trade.
Insurance is based on risk and before you ask yourself the question, “what insurance do you need to start a small business” you should consider some key risk factors that we will get into below.
When I speak with clients that are considering starting a small business for the first time they usually tell me that they have spoken to a friend or family member and they have told me I need this specific insurance. Although these conversations are good, unless they are qualified to give insurance advice than they should leave these conversations to insurance advisors. I don’t say that to try and discredit them in anyway, I say this because typically the next step after these conversations is to go home and go down the deep dark hole of searching online which then leads to confusion and further misinformation. Then you usually find yourself getting quotes for 5 different types of insurance policies when really you only probably need 2 of them and your insurance budget has blown out to $10,000 and you decide against starting your own business.
Most conversations with an Insurance Broker are free and we understand the insurance policies that we sell which allow us to guide you on what policies you need and what you don't need.
Let's start looking at what insurance you need to start a small business. The best way to know what insurance you need to start your own business is to understand what policies are available and what they typically cover. I will summarise a few key policies below.
Public Liability Public Liability Insurance is extremely common and its recommended that every business owner should have a Public Liability Insurance policy in place. This is also the most frequently asked for insurance from contractors and commercial site owners. If you are planning on working on a job site, at commercial premises or as a sub-contractor to someone else then there is a good chance that they will ask you for proof of this insurance being in place.
Public Liability Insurance has 2 potential claim triggers, one being personal injury and the other being property damage. This means that before any claims are accepted either personal injury or property damage has to have occurred or is likely to occur.
Management Liability insurance is designed to provide protection to both the business and its directors or officers for claims of wrongful acts in the management of the business.
A business insurance pack can provide cover for your business premises and contents, against loss, damage, theft or financial loss from an insured interruption to the business.
Purchase up to six products under one Business Insurance Package.
Public Liability Insurance has 2 potential claim triggers, one being personal injury and the other being property damage. This means that before any claims are accepted either personal injury or property damage has to have occurred or is likely to occur.
Public Liability will also usually include the same cover for Product Liability which gives your products the same liability triggers. For example, your product has caused injury or property damage.
Professional Indemnity This insurance policy can be a little tricky when talking with friends and family as it seems to be one of the policies that people get mixed up quite frequently. If your business involves giving advice or recommendations then you may need to consider having Professional Indemnity insurance.
Professional Indemnity insurance was usually a policy taken out by Lawyers, Accountants, and Engineers however, now many more industries are requiring this type of cover and it is quickly becoming a necessity on the “what insurance do I need to start a business” list.
This policy is a little broader and the claim trigger under this policy is causing some sort of financial loss to a third party.
For example, if you are a recruitment company and have recommended a candidate to a company and forgot to do a criminal history check which leads to the business needing to terminate the employment and source a new employee for the position then this could potentially be covered by your PI Insurance.
As we have become more litigious in nature, the more we have needed to extend this cover into more industries.
So what have we covered so far by having these 2 policies in place?
You’ve reduced your risk and covered the potential of injuring someone else and being liable for medical expenses
You’ve reduced your risk and covered the potential of damaging someone else's property and being liable for repair costs
You’ve reduced your risk and covered financial losses based off your professional advice
All of these policies are covering your exposure to other people, now it's time to consider covering losses to yourself.
Some other policies that may be worth adding to the “what insurance do I need to start my own business” list is policies that will cover assets you own. Whether you are working from home, keep stock in your garage or carry around tools in the back of your ute every day, you should consider covering these items for replacement value if they were damaged or stolen.
The question you need to ask yourself is; If I had to go out tomorrow and buy $X amount of tools to keep trading, how much of an impact would this make to my business? This is a means of risk transferring, you set an amount that you are willing to outlay (an excess amount) to transfer the risk of having to replace the value of all of your items (value of goods).
A Business Package Insurance policy is a form of business insurance that allows you to package up multiple levels of cover under the one policy and depending on how your business operates will depend on how you structure this policy.
If you have a fixed business location and do not take goods or equipment away from the premises then just a property damage section of cover will cover these items for accidental damage, fire and weather-related instances.
Please note that on commercial policies, theft cover is an optional add-on and if you want to be covered for this then you will need to include this as well as a separate amount. For example, you can cover $100,000 of property damage and only cover $20,000 of theft cover as it’s unlikely that anyone stealing your items could steal large machinery or pallets of stock.
If you are taking items away from your business address like tools or specialised equipment then a General Property section should be added to your policy and can be insured in 2 different ways.
You can either insure a dollar value for example $10,000 cover to cover multiple tools of various values. The insurer will usually specify a specific amount that they are willing to cover and this is usually $2,000 – $3,000 per item without listing.
If you have tools or equipment that exceeds this value then you will need to specify the specific items on your insurance. For example, a portable welder insured for $5,000. This will insure just this specific item for the specific value you have allocated.
Last but not least another policy worth mentioning while we are considering what insurance do you need to start a business is a Personal Accident and Illness insurance.
If you have previously been employed and now venturing out into your own business then this policy is worth considering as in Australia employers pay Workers Compensation insurance to cover their employees getting injured on their way to and from work or at work.
When you become a business owner you lose this cover and should consider protecting yourself if an injury was to occur while you are on a job site. You can cover this in either of 2 ways, under a Life Insurance policy or a Personal Accident and Illness policy. Both policies are recommended that you speak with a professional to arrange either of these 2 policies.
As you can see the answer to the initial question of “what insurance do you need to start a small business” is quite broad, depends on your risk tolerance and the potential impact that certain scenarios could have on your financial situation.
A conversation with an Insurance Broker is free and having a good relationship with your Insurance Broker is worthwhile as these policies and levels of cover will continue to change as your business grows and changes.
General Advice Warning: This advice is general and does not take into account your objectives, financial situation or needs. You should consider whether the advice is appropriate for you and your personal circumstances. Before you make any decision about whether to acquire a certain product, you should obtain and read the relevant product disclosure statement.
All information above has been provided by the author.
Priority Insurance Brokers, ABN 95 655 563 616, AFSL 233750
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