Surviving in the aftermath
Most businesses are insured to rebuild their premises after a natural disaster, but more than half would struggle to stay afloat during reconstruction because they do not have business interruption insurance.
Professor Allan Manning, a global insurance expert, said it was one of the most vital yet overlooked types of insurance on the market.
The cover provides businesses with both their normal income, and the cost of ongoing overheads, when their operations are disrupted by an unintended event, such as flood or fire.
Professor Manning said 92 per cent of WA business owners have fire insurance, but it would appear that relatively few have given serious thought as to how they would stay afloat while rebuilding their damaged premises because only 46 per cent have business interruption insurance.
WA’s take-up was the lowest in the country, four percentage points below the 50 per cent national average.
This is despite the fact BI cost only 65 to 75 per cent per $1000 sum insured compared with the cost of fire insurance.
Professor Manning said the Victoria bushfire disaster of 2009 was a prime example of how the widespread absence of BI insurance caused entire communities of entrepreneurs to lose their businesses.
Hundreds of premises razed to the ground on Black Saturday were eventually rebuilt, but very few of those original business owners could reopen when their new premises were ready because they had been unable to sustain ongoing business overheads such as wages, mortgages and car leases.
“The postman does not stop delivering bills when the fire brigade leaves after a fire or after a storm subsides, ” he said.
Professor Manning said BI was overlooked because it was widely misunderstood.
“It’s often called loss-of-profit insurance, so people think it’s not relevant to them if they are just covering their costs rather than making profits, ” he said.
“They cover themselves for glass breakage, even though they can continue to run a business with a broken glass, but they forget about BI which can protect their lifestyle, their families and that of their employees.”
Professor Manning said BI was not only important when there was a total loss of income, but it could also safeguard a company against partial loss, either through a reduction in turnover or a sudden increase in the operating costs.
He said a Canberra hotel which had BI insurance was able to claim when two floors were closed for a police investigation following the murder of a diplomat within its premises recently.
The hotel claimed under a murder and suicide clause for the income that it would have normally derived had those two floors been open to the public.
Businesses which suffer a reduction in customers following a hit to their reputation can, in some cases, successfully claim under the insurance.
For example, had the murder at the Canberra hotel turned customers off from staying at the hotel in the immediate aftermath, the normal revenue could have been recovered through its BI insurance.
Professor Manning said about 30 per cent of payouts made under BI were for dependency claims, or the loss of income resulting from problems further along the supply chain.
This usually derived from a BI clause covering losses resulting public utility outages.
A prime example was the 2008 explosion at Apache Energy’s Varanus island gas plant, which prompted more than $100 million in insurance payouts for companies along the supply chain that suffered financially as a result of the diminished gas supply.
Vero Insurance claims BI is one of five types of insurance that all small business owners should consider.
But John Phillips, the insurer’s chief underwriting and portfolio manager, said businesses that were highly dependent on equipment, stock and premises, such as restaurants, were best served by BI.
Tradesmen and other mobile businesses less reliant on premises to earn a living had less need for BI.
“It’s not uncommon for the business interruption component of an insurance claim to be greater than the cost of repairing the physical damage, ” he said.
“While your income may stop after a loss, many expenses will continue. It can be months, or even years, before you’re back to your old level of turnover.”
Mr Phillips said business owners should seek advice from an independent insurance broker.
Business owners could find contacts from the National Insurance Brokers Association website.
MOST IMPORTANT TYPES OF INSURANCE FOR AN SME
Business interruption: Protects cashflow; important for operators highly-reliant on their premises or equipment to earn a living.
Fire and other damage: Pays for replacement and reconstruction costs for damaged or lost stock, contents and property; important for businesses that have premises or stock they want to protect.
Liability cover: Covers businesses for legal claims resulting in third-party property damage and/or bodily injury arising out of business activity.
Motor cover: Covers ongoing repair and replacement costs of commercial vehicles if they are damaged or lost.
Management liability: Covers legal claims and statutory penalties arising from management and executive responsibilities such as employment practices and WHS regulations.
© The West Australian