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Business insurance – balancing risk and price
All businesses face a variety of risks, and many risks can be mitigated through business insurance. Of course insurance comes at a cost, so the question facing a business is whether the cost of the insurance outweighs the potential cost of the risk.
Most organisations will require a number of mandatory business insurances to comply with legal obligations.
Employment – Workers Compensation
If you employ staff, you must hold Workers Compensation insurance. This insurance covers wages and medical costs in the event that an employee is injured in the course of their duties.
Workers Compensation insurance is regulated on a state-by-state basis. The cost varies between 1.2% and 2.5% of the annual wages expense.
Motor Vehicle - Third party personal injury insurance
If the business owns Motor Vehicles, Third Party Personal Injury insurance is required (known as CTP in NSW). This insurance covers the costs of compensation for third parties injured or killed when a vehicle is involved in an accident.
This insurance is regulated on a state-by-state basis, and policy terms and costs vary widely between states and providers.
Other insurances are not compulsory in terms of government regulation, but may still be required – by a Bank as part of a lending agreement (eg if a loan is secured by a commercial property then Building insurance will be required) or a licensing body (e.g. Professional Indemnity insurance is usually required to hold an Australian Financial Services License).
There are also several types of risk where the potential monetary cost is very high, and therefore should be mitigated to the extent possible.
Professional Indemnity (PI)
PI insurance is designed for individuals and businesses who provide services or advice. It covers the individual or business against legal costs and claims for damages to third parties which may arise out of an act, omission or breach of professional duty in the course of providing the services. The costs to defend a legal action are very high.
The cost of PI insurance varies depending on the risk profile of the advice / service and the amount of cover sought. Cover ranges from $1000 pa for $1 million cover, to $2,000 pa for $10 million cover.
Public / Product Liability
Public Liability insurance covers a business for legal costs and losses or damages by a third party (ie anyone the business has an interaction with) as a result of its activities.
Very often Product Liability insurance is usually included or bundled with Public Liability insurance and covers a business that supplies products. It covers costs related to claims of personal injury or property damage arising from product use (or product failure). Examples include injury arising from sale of faulty goods through to illness caused by food served in a restaurant.
The cost of Public Liability insurance varies considerably depending on the risk profile of the business and the amount of cover sought. Cover starts at $1000 pa for a small business but can be considerably more.
Directors and Officers Liability (D&O)
This insurance reimburses the business, or its Directors and Officers individually, for costs or losses incurred arising from legal actions brought against them in their capacity as Directors or Officers. Such costs could arise from shareholder or regulator actions for example.
In many instances Board members will not agree to being appointed unless appropriate indemnity cover is in place.
Costs are in the range $5,000 to $10,000 per $1 million cover.
Almost every business which owns a property will hold property insurances. Not only should the building itself be covered, but consideration should also be given to insuring the contents of buildings which hold inventory or machinery.
For a business which regularly transports goods, goods-in-transit insurance should also be considered.
Cyber risk is a relatively new insurance which covers costs associated with remediation following a cyber-related security breach, data theft, malicious data corruption or similar event. Costs covered could include the cost of notifying affected account holders, recovering lost or damaged data and damages claims by affected third parties such as account holders.
Businesses who have large customer databases, high electronic transaction volumes with customers or who routinely collect and store customer data should consider this insurance.
Costs vary widely depending on the risk profile of the business.
There are any number of additional insurances which are available such as business interruption, political risk, weather risk and so on. The need for these types of insurances should be determined based on an assessment of the likelihood and potential cost of the risk versus the cost of insurance.
A word of caution
While insurance can provide wide protection, it will not apply where there is willful negligence, criminal behaviour or where a potential policy event is outside the terms of the policy. Care needs to be taken to ensure that the terms and applicability of insurance taken out is understood and appropriate for the business.
Insurance cannot cover every risk that a business faces. However the judicious use of insurance cover can significantly reduce risk for reasonable cost. If you need help with business insurance reach out to the seasoned team at Fullstack whom can help with outsourced CFO insights.
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Stuart Reynolds is the founder of Fullstack Advisory, an award-winning accounting firm for businesses leading the future. He is a 3rd generation accountant who specialises in tech companies, agencies and entrepreneurs.