After hearing Adam Pinkard's impassioned speech at the Australian Distillery Conference earlier this month about "The impact of fire on and recovery to your business", we thought we'd further emphasise his point on the importance of "underinsurance".
But first, what is underinsurance? Underinsurance happens when you've taken out insufficient insurance to cover the replacement value of your property and its contents when something goes wrong. Being underinsured exposes you to financial hardship or inadequate cash flow when disaster strikes, and it can make all the difference between the success or failure of your business.
73% of Australian small-to-medium sized businesses do not have Business Interruption insurance
62% of Australian small-to-medium sized businesses are underinsured
So, to help you avoid falling victim to the underinsurance trap, we've covered off the most common instances when underinsurance can occur.
Your cover is based on the market value of the building instead of the rebuild cost
For buildings, this means getting a professional valuation for the full cost of rebuilding your property including any outbuildings (sheds, farm buildings, silos, rainwater tanks etc), plus any extra charges that could be involved in rebuilding, such as:
- the demolition of the entire structure, including removing the floor slab and foundations
- removal of debris
- the need to meet updated building codes
- the potential rise in labour and material costs
- fees for architects, surveyors, planning experts etc.
- public authority requirements and the latest building regulations
It's common for these extra charges to generate an additional 15%-20% on top of the pure reconstruction cost.
You've altered, added features or extended the property
Making any alterations, additions or extensions to your business or property can often increase your sum-insured. So, it is essential that you let your broker know of any major pieces of equipment, machinery, or new depots or locations that are taken on or acquired so that they can be added to the policy.
You are carrying more stock now than when you took out your insurance policy
As your business grows, it's more than likely that your stock levels will increase accordingly, so it's fundamental that your broker is updated with the changed stock levels. Ensure your cover reflects the true replacement value of your stock and that your insurance coverage grows with your business.
Business interruption (BI)
Most people understand the need to insure their business assets, such as buildings, contents and motor vehicles. But business interruption insurance is arguably just as important.
Business interruption insurance covers the loss of income due to an unexpected event that forces your business to shut down temporarily. Whether it’s the result of a fire, flood, storm, a pandemic, a machinery breakdown, a tax investigation or even a cyber incident, a business interruption policy can help keep your business running smoothly during a temporary crisis.
Business Interruption insurance is especially recommended for businesses in more complex industries, including those who undertake the handling or storage of dangerous goods (such as ethanol), or those in areas that are prone to severe weather events.
A BI policy can be tailored to cover:
- loss of sales profit
- ongoing operating expenses, such as electricity, rent, and staff wages
- temporary office setup
- repair or replacement of property that's been damaged
- training costs for operators or replacement of machinery
- closure of your business due to government-ordered street closures
- damage to a neighbouring business which has a negative impact on your business operations
It is critical that you receive good advice, and a good broker will discuss with you that your sum-insured are adequate and that the policy provides good quality cover and, crucially won't leave you underinsured in the event of a claim.
Visit Insurance Council of Australia as a starting point to help accurately track and calculate the cost of your assets.
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