Insurance can seem like a complex area, which is why it’s so important to understand the basics. Here, we explore some of the fundamental concepts that underpin most business insurance policies.
An insurance policy has a number of different parts, explains support manager, John Clark. “The policy will set out the cover that applies under the policies, the conditions you must comply with and any exclusions. Almost every policy will include these features,” he says.
“The business interruption section of the policy will also include information about indemnity periods”
Scope of cover
The first section will typically explain the policy’s scope to protect the business against loss or damage to the building in which it operates and its contents or stock. This part of the policy may include information about the policy’s conditions, such a requirement to have fire extinguishers and burglar alarms that are switched on when the premises are vacant.
The business interruption section of the policy will also include information about indemnity periods. This is the length of time the insurer will make up the loss of profit or revenue as a result of an insured event such as a fire, storm or earthquake.
The indemnity period’s time span will depend on the nature of the business being insured and the value of the cover versus the price of the premium.
For instance, if the policyholder requires a specialised piece of equipment to trade, the indemnity period should consider how long it will take to replace the equipment if it’s destroyed, taking into account any time needed for it to be imported if it’s made overseas. When working out the indemnity period, take into account how long it may take for income to reach pre-loss levels.
Then make sure the equipment, stock and the building protected. This means that in the event a fire or loss causing damage to the assets you own, the cost of their replacement can be covered. It’s also important to have business continuity/interruption insurance so the business can keep running even after it has suffered a serious incident covered by insurance.
Brokers or advisers are able to use a tool to identify risks to which the business is exposed, based on the claims other businesses in the sector have made. “Every business has very different exposures – so the insurance a sandwich shop may need will be very different to the insurance a baby goods shop will need. A broker or adviser can assist their clients determine the relative risks to which each business is exposed. But it’s up to the client, ultimately, to decide which covers to put in place,” Clark explains. “Risks also vary from business to business. For example, one sandwich shop may have an especially slippery floor.
While another one may have equipment that’s not well maintained. So the risks these businesses face vary enormously, even though they are both sandwich shops,” he adds.
Insured values differ
When it comes to the amount insured under the policy, it’s important to pay attention to replacement costs, especially when it comes to buildings and equipment.
The value of many items appreciate over time due to inflation and rising costs as new models are issued. The exception is stock, which is covered for its value, rather than for its replacement cost. It’s also vital to understand different risks are insured for different amounts. For instance, contents’ cover may be for a sum such as $100,000, to reflect the damage an event such as a fire can cause, destroying the entire contents of a building.
Whereas with burglary, you may elect to be covered for a smaller amount, because burglars don’t normally steal a business’s entire contents. Insurance is complex, which is why an insurance broker or adviser offers so much value. A broker or adviser can help make sense of the fine print and offer guidance about the level of cover that’s right for the business. Contact your broker or adviser today to find out more about your cover and the level of protection it provides.
Important notice – Steadfast Group Limited ABN 98 073 659 677
This general information does not take into account your specific objectives, financial situation or needs. It is also not financial advice, nor complete, so please discuss the full details with your insurance broker or adviser as to whether these types of insurance are appropriate for you. Deductibles, exclusions and limits apply. These insurances are issued by various insurers and can differ.