When it comes time to make a claim, you’ll appreciate having appropriate insurance cover in place. But all too often, businesses don’t have the right policies, don’t have enough insurance or the insurance they have isn’t appropriate for their circumstances.
So let’s take a look at some of the most common mistakes insurers make and what you can do to avoid them.
1. The business is underinsured
Underinsurance is a complex area, and there are various ways underinsurance can impact a business, explains Steadfast Group broker technical manager Michael White.
“Often, the sum insured is inadequate. Let’s say the insured sum of a building is $1 million but it should have been $2 million. The building burns down and because the insured sum is not enough, the insured can only claim $1 million. This means there’s shortfall of a $1 million in the cost to rebuild the building,” he explains.
In another similar situation, if the sum insured is inadequate, the insurer may only pay a proportion of the cost of the damages. “In this situation, if there’s a partial loss, then the amount the insurer has to pay is reduced by a percentage that’s proportionate to the actual sum insured, relative to what the sum insured should have been,” White explains.
So let’s say the insured sum for a commercial building is $1 million, but the sum insured should have been $2 million. Unfortunately, the building is damaged by a storm and the cost of the repairs is $400,000. Under most commercial insurance policies, the insured can recover $400,000 x $1 million/80 per cent of $2 million, which works out at $400,000 x ($1 million/$1.6 million), which equals $250,000.
“All businesses should have a formal risk assessment process that’s regularly reviewed and updated”
Underinsurance also has a number of other guises, explains White. “Some businesses do not have cover at all or have some cover but they do not take other insurance. For example, the business insures the building but does not take out business interruption insurance, or it does not take theft cover or has a very low limit for theft.”
There is a number of ways to address underinsurance. When it comes to insuring a building, if the building is of high value or is complex, it’s an idea to engage a valuer or a builder to determine the appropriate sum insured for the property.
Plus a good first port of call is to ask your Steadfast broker to take advantage of the building calculators available to them to help determine the appropriate sum insured. As with all of these things, the result produced by the calculator depends on the amount of information available and its accuracy.
2. The business does not assess its risks appropriately
All businesses should have a formal risk assessment process that’s regularly reviewed and updated, quarterly is a good idea, to ensure the business is across an ever-changing risk environment. It’s a good idea to categorise risk, for example into four buckets: operational, strategic, regulatory and reputation. It’s also an idea to engage a surveyor to formally assess any risk to property, such as fire and theft risk.
Once the business has formally identified and prioritised the risks it is facing, it’s essential to put in place mitigation strategies to reduce the potential for these risks to eventuate.
3. The business does not take out the right type of cover
In some situations, the business does not understand the cover it needs to have in place. Then, an insurance event happens, and it finds out it is not adequately insured. Restaurants are a good example, says White.
The Australian federal government’s Smart Traveller web site has lots of information about how to keep staff safe while they are working abroad. It recommends taking steps such as researching the destination, having a detailed emergency response plan and putting in place personal security to ensure staff are protected no matter where they are working.
Businesses have a duty of care to ensure their staff are safe at all times. If you have staff located overseas, ensure you have put in place steps to reduce the risks they face and support them to come home safe every day.
This information is to assist you in understanding some of the terms, implications and common considerations with professional indemnity insurance. It is not complete, so please request full details from your insurance broker as to whether professional indemnity insurance is appropriate for you.