It’s hard enough seeing your life’s work go up in flames, but imagine the trauma of discovering the insurance cover that you’ve been paying for years isn’t enough to meet the costs of repairing or rebuilding your small business.

Most responsible business owners have property insurance cover for the loss and damage to buildings and contents. A policy will generally have broad coverage that includes but is not limited to fire and extraneous perils (storms, earthquakes), burglary / theft, and malicious damage.

But if the sum insured isn’t enough to get the business back on track, like many underinsured business owners they’ll be out of pocket and potentially out of business when disaster strikes.

According to the Insurance Council of Australia, 50% of small business buildings are severely or significantly underinsured, and 20% are not insured at all. Sole traders have the highest rate of non-insurance, with 40% operating their business without any insurance cover.

While affordability is the key factor leading to underinsurance for many businesses, research suggests purchasing insurance is still seen by many purely as a matter of price. Lack of knowledge about replacement costs, as well as insurance and how it “works” are other factors.

Underinsurance isn’t just a problem for business owners who want to reduce the cost of their premium. It can happen to those with the best intentions.

One of the most common mistakes by business owners is undervaluing the replacement cost of assets. Scott & Broad | Clark Pacific Director, Ian Burgess says calculating the replacement value of assets is often beyond the expertise of time-poor business owners and managers.

“Too often owners make educated guesses, and it’s here that they stand the greatest chance that something will go wrong,” he says.

He recommends business policyholders allow for future building cost increases as they often go up dramatically if there is a major insurance event and demand for labour and materials increases.

Between 2000-06 building costs rose 29% in Sydney, 38% in Melbourne, 38% in Adelaide, 56% in Perth and 75% in Brisbane. If your property is destroyed you need to consider:

• future replacement costs;

• any clean-up costs, including possible asbestos removal;

• the time and expense involved in managing potential disputes;

• currency fluctuations;

• any costs associated with delays in local council approval processes, and

• the cost of relocating or renting premises temporarily.

Another leading cause of underinsurance is undervaluing the cost of replacing tools and machinery following a loss. In fact 90% of small business plant and equipment is severely or significantly underinsured.   In most cases owners simply fail to take into account unforseen transport costs, production costs due to lead time and import delays, and alterations needed to comply with Australian standards.   While insuring buildings is a given for many business owners, even businesses with adequate property and contents cover can find themselves underinsured if their income is not adequately protected.

Research suggests 79% of small and medium enterprises (SMEs) have heard of business interruption insurance yet only 35% have it. This is despite SMEs being particularly vulnerable as they lack the reserves to deal with a serious disruption. Hit with a major loss, 70% of them fail.

Business interruption cover provides financial support to a business if it is prevented from working due to damage by fire or other insured perils. It provides cashflow to meet ongoing expenses such as staff wages, rent or relocation costs and maintains expected profit until a business gets back on its feet.

Talk to your Scott & Broad | Clark Pacific broker about whether you need an asset evaluation or simply let us know if you’ve bought new equipment, or made changes or renovations to the business recently. We’ll then ensure these additions are included  in your policy. 

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