A lack of understanding around what insurance jargon refers to could cost you dearly. Here are some industry terms and concepts you should be clear about before signing anything.

Insurance is a contract (i.e. a legally enforceable agreement) between two or more parties. It typically involves an individual or business paying premiums to transfer specific risks to an insurer. If something does go wrong, the insurer then has to pay for, say, a burnt-down shop to be rebuilt.

So far, so simple. However, as is the case with most contracts, insurance policies are complicated. To understand how they work you should, at a minimum, get familiar with the following.

Key insurance terms

Product disclosure statement: In certain types of insurance, such as home and motor, your insurer needs to provide you with a product disclosure statement. As well as the insurer’s contact details, this sets out the significant benefits, cost, terms and conditions, cooling-off period and dispute-resolution process relating to the policy they are offering.

Duty of Disclosure: When you take out an insurance policy, renew a policy or vary it, you have a duty to disclose to the insurer every matter that you either know or a reasonable person in the circumstances could be expected to know are relevant to the insurer whether to accept the risk and if yes, on what terms. You can’t, for example, be diagnosed with a terminal illness and then apply for a life insurance policy while keeping the diagnosis secret.

Agreed value/Market value: Let’s say you purchase a motor vehicle, costing $20,000 for your business. You’ll have the option of insuring the vehicle for either agreed or market value. Agreed value means you and the insurer agree to a set sum (for example, $20,000) being paid out in the event of a successful claim.

Market value means the insurer will only pay out what they would currently be worth in the market. If the vehicle is stolen three years after being purchased, the pay-out might only be $16,000.

Excess (also known as deductible): To discourage claims, especially for minor losses, and to reduce premiums insurers use a carrot (no-claim bonuses) and a stick (an excess). In the above example, the insurer might insist on an excess of $500 on the vehicle. That way, if the vehicle is damaged, the business owner out of their own pocket pays for the first $500 of the cost of repairs. Policies with larger excess are cheaper. That’s because you’re less likely to make a claim and will get a relatively lower pay-out when you do.

Compulsory insurance: While businesses often have the choice to insure against risks or take their chances, some insurance policies are legally required. For example, workers’ compensation insurance is compulsory for any business owner who has employees. Likewise, professional liability is compulsory for professionals in many occupations.

Exclusion: This is a clause in the policy which sets out the circumstances in which an insurer will not be liable for a claim under the policy. For example, a motor vehicle policy may exclude cover for the theft of a vehicle if the keys were left in the ignition. Failing to be aware of exclusions in an insurance policy is a common and often costly mistake.

Period of cover: The period for which an insurer agrees to cover you, usually a year.

Waiting period: Some types of insurance, such as income protection, require the individual making a claim to support themselves for a period of time (until a lump-sum payment is made or recurring monthly payments start). If money is tight, you can lower premiums by agreeing to a longer waiting period.

Benefit period: This refers to the period of time in an income protection policy in which an insurer will pay out if you suffer a loss covered by the policy. For example, some income protection policies pay out for one year, others until retirement age. Again, a cost-benefit trade-off needs to be made; the longer the benefit period, the more expensive the policy will be.

General Insurance Code of Practice: People often worry an insurer will take their money but try to wriggle out of providing a pay-out if they make a claim. However, insurers must abide both by the law and a code of practice developed by the Insurance Council of Australia. If you have issues with an insurer (or are worried you might), you should read the code.

“Australia is one of the world’s most underinsured first-world nations. Australian SMEs owners don’t appear to be any less blasé than their non-business-owning compatriots.”

Underinsurance: This can refer to one of two things:

1. Having no insurance at all. Most businesses do not take business interruption insurance, meaning that they cannot claim economic losses when the business has to close down for some reason.
2. A policy that doesn’t cover the value of what is being insured. For example, if you insure a building and the replacement cost of the building is $2 million but you only insure for $1 million, if the building is burnt down, you can only recover $1 million. If the building is damaged but can be repaired for less than $1 million, the insurer may be able to reduce any payment to reflect the underinsurance. This is to encourage you to insure for full value and pay the right premium.

Australia is one of the world’s most underinsured first-world nations. Australian SMEs owners don’t appear to be any less blasé than their non-business-owning compatriots.

Still feeling confused?

Fortunately, it’s possible to outsource the task of checking whether your policies offer either agreed or market value or have any unreasonable exclusions to an insurance broker (i.e. an intermediary, who acts on behalf of you in applying for insurance).

If you need expert advice on whether your policies are providing the cover your business needs at a fair price, contact us and we will be happy to speak with you.

One of the drawbacks to owning a growing business is having more at stake. An expanding business is likely to be having dealings with an ever-increasing number of individuals, getting involved in a wider range of commercial activities, even expanding into new locations.

A growing business usually requires a growing workforce. With more equipment and larger premises come more expensive rent payments. In such circumstances, any revenue-disrupting interruption to its activities can soon escalate into a cashflow crisis.

In short, the cover that was sufficient when you were a sole trader or running a scrappy start-up isn’t likely to be adequate once you’re heading up a thriving enterprise. The end of the financial year is a great time to think about how your business has changed over the last 12 months and review your insurance policies. If you’re pressed for time or simply want the reassurance of an expert opinion, a Steadfast Insurance broker can assist you.

Employers’ liability insurance

When it comes time to make your first employee hire, you’ll be legally required to take out workers’ compensation insurance. You should consider taking out a form of back-up workers’ compensation insurance called employers’ liability insurance. This is because it’s possible for an employee to suffer an illness or injury that is job-related yet not covered under a standard workers’ compensation policy (employers’ liability insurance can cover for these type illnesses, injuries and fatalities.) Even if it’s not a legal requirement, to be an employer of choice, you could have employers’ liability insurance as an additional benefit if you want your employees to have better cover in the event of an employee suffering a misfortune.

Directors’ and officers’ insurance

A growing business will inevitably become more hierarchical and possibly move from a sole trader or partnership business structure to a company one. In any largish enterprise, there are individuals – executive directors, non-executive directors, executive officers, senior managers and the company secretary – who shoulder important responsibilities.

Understandably, these people don’t want to be placed in a position where they could suffer personal financial loss as a result of doing their job. By providing directors’ and officers’ insurance, a business owner can provide cover to key staff and board members. That means they can be reimbursed for their legal costs if competitors, creditors, employees, liquidators, regulators or shareholders take legal action against them.

Business interruption insurance

The more your business grows, the larger its fixed costs are likely to be and the more expensive an interruption to its smooth functioning will become. A suburban café may only be out of pocket a few hundred dollars if a blackout means it has to shut down for the afternoon. In contrast, it’s estimated Starbucks’ recent decision to close its US stores for an afternoon (to provide racial-bias training to staff) cost around US$12 million (A$16 million).

If an unfortunate event means you need to shut up shop, your revenue will typically be severely impacted during the shutdown period. Nonetheless, you’ll probably continue to face the usual wage, rent and other business costs. As explained more fully here, business interruption insurance can provide a pay-out to cover you for those costs, as well as make up for lost sales.

Cyber insurance

In the digital age, an IT issue can be as devastating as any fire, flood or storm. The two threats businesses, especially smaller ones with limited IT budgets, most need to worry about are ransomware attacks and data theft.

A ransomware attack results in a business’s files being encrypted. Important data is rendered inaccessible, which can make it difficult or impossible for a business to keep operating – until a ransom is paid to return things to normal. It’s estimated that, globally, ransomware inflicted US$5 ($A6.5 billion) of damage in 2017.

Governments in Australia and elsewhere are tightening privacy regulations and stiffening financial penalties for data breaches. If a malicious actor overcomes your cyber security and captures your customers’ personal data, the consequences can be more serious than brand damage. You could find yourself being investigated by the government regulator and being sued by your customers. As explained more fully here, cyber insurance can help cover financial losses arising from a cyber security breach

Source: This article was first published by Steadfast Well Covered 
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