Mistakes to avoid when taking out business insurance

Correspondent | Tuesday June 9, 2015 15:37

Economic conditions remain extremely tough and many businesses are looking to cut costs. Insurance costs are being scrutinised as a result, but a common mistake is to then become exposed to risks that can ultimately destroy a business. “We see this quite often with businesses that rush to take out the shelf policies. This fails to take into account the environment and evolving risks for businesses, like labour unrest or political unrest in a foreign country,” says Phaladi.

It is in this environment that the national adviser networks are expected to play an increasingly important role in finding the best solutions to the insurance needs of companies. Lower premiums can be achieved as these advisers shop around for the most appropriate coverage at the best price and can also tailor solutions for specific needs and localised business or trading conditions.

“Going direct is not always what it seems. It is sometimes better to avoid general policies as there is a growing need for more specialised coverage,” says Phaladi. Companies are often not insuring themselves for lost revenue when an unforeseen event like a fire takes place. “Most businesses have coverage for the fire resulting in shutdown, but not what is called business interruption insurance for the loss of sales and income during the period of the shut down.”

Another common mistake is not updating policies or taking changed circumstances into account. “The risk is that it can leave an active policy null and void,” says Phaladi. Businesses are also not doing enough to take action themselves to reduce premiums. “For example, simply installing an alarm system or developing a workplace safety policy to reduce occupational injuries and hazards can help bring premiums down.” Businesses need to improve their understanding of what is excluded from policies too. “We find many business owners are not addressing these risks at executive level on a formalised basis and leaving it to operational managers to take care of,” says Phaladi.

The use of a commercial insurance broker could be a step in the right direction to identifying and plugging coverage gaps. “It is critical that brokers understand the needs of a business and walk the risk. They can only tailor the best solutions if the risk is clearly understood. Too often, only lip service is paid to this area, leaving little understanding of the cost implications and evolving operational and trading risks,” says Phaladi. Sometimes having a high deductible (or excess) that simply reduces premiums may not make business sense, for example.  A deductible is the amount of expenses you pay out of your pocket before the insurer pays and insurance premiums are typically cheaper when they have high deductibles.

“Businesses often look to increase these where they can, as it can bring down the pay-away cost of insurance as an operating expense. But this needs to be balanced against affordability and the cost benefit achieved in doing so,” says  Phaladi.

Phaladi says as a general rule it is not covered as it will depend on which policy has been taken out and the reason for the power failure. Business interruption insurance includes perilous events like wind, snow, fire, or an explosion as the underlying cause. “The reality is in 90% of cases the policy won’t respond to load shedding damage. Businesses should be careful in rushing out to buy business interruption insurance on the expectation that consequential revenue loss would be covered. In most instances this loss would not be covered.”

 

Taazima Kala,

Hotwire PRC