Why small business insurance often fails to protect

Futurist Topics - Management

 

Insurance market in India, China and rest Asia

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Small businesses spend hundreds of millions a year on insurance yet policies may not fully cover some of their most serious risks. Risk management is a vital part of running a small business, yet neglected by most small business owners who say they haven't got the time.

Every business faces daily risks and the smaller the business, the greater the impact can be. Failure of a supplier, insolvency of a major creditor, changes in exchange rates, theft by staff, computer virus attack.

The trouble is that when disaster strikes, you may need more than a small business insurance payout to keep going. And disaster comes around often. One in five businesses will experience a serious theft or a fire in 10-20 years.

Small business owners run on a tight margin and don't have spare resources to tackle major issues, so are very vulnerable to business disasters and other negative events. Small business insurance may cover obvious costs but not all the hidden consequencies.

Take backup of computer data for example: you assume that everything works find until a hard disk crashes. When you come to restore data you find either the system was not backed up recently enough, and you have lost vital e-mails and other data, or that the backup files are corrupt. This kind of event is far commoner than you may imagine. Every computer your business owns is a separate risk of sudden hardware failure or attack by a virus, and small businesses are especially vulnerable because they don't have the backup of a professional IT department, and are often dependent on a varied collection of computers, and staff who don't fully understand how to use them.

Does your small business insurance cover you for destruction of your business following staff errors in backing up or even for the loss of your own personal organiser and all your diary for the next 6 weeks? For lost orders, lost time, lost mailing lists, lost accounts, embarrasment with customers, chaos in the office? Some surveys suggest that 70% of small businesses fail following a major data loss and their business insurance policies rarely cover all direct and indirect costs.

It can be as a simple as being robbed of your portable in the street - and the backup CD-Rom inside the drive of the machine. I have lost count of the number of friends I know who have lost months or even years of work when their own portables have been stolen or failed to boot up.

You may have perfect office-wide backup systems, but it can happen to you all the same after a major break-in - the backups may have been up to date, but all get stolen at the same time. Or after a fire, when all machines and backup data are destroyed.

Ready for more? Are you adequately insured against loss of your web server for a week, or from damage caused by your broadband internet connection going down, or your e-mail system being corrupt for several days, or your switchboard being out of action? Do you know how you would manage? The fact is that no small business insurance policy will cover fully such things - and even if it did, no small business would be able to afford the premiums because the risks are too frequent and the cost of damage too great.

Another example is the huge amount of time needed to deal with a legal case - perhaps a claim for unfair dismissal, or from an unhappy client. Once again, small business insurance may cover for direct legal costs, but what about the loss to the momentum of the business, caused by up to 50% of your time being taken up with the case for several weeks? Or damage to your brand from a court case, despite the fact that you won at the end.

The list goes on, and includes a call to jury service which can sometimes take a small business owner out of the office for many weeks or months, or long term sickness of one of the three or four most important people in the team.

And then there is your own health: life insurance is one thing, and small business health insurance cover is another, but the reality of serious illness is often a knockout blow to profitability and growth.

Risk assessment is vital. Take a walk around the office and remember the law of all small business which is that whatever can go wrong may well do so, and usually at the most inconvenient time. Protect your business: plan how you can defend your future against some of these risks - which are very expensive to fully insure against.

Backup your data regularly, keep copies off-site, invest in alternative technology, keep things in order, imagine the worst - and the reality will always be a pleasant suprise.

And whatever you do, make sure you have a proper small business insurance policy, that it covers your major risks, the amount of cover is correct, and that you have read all the small print.

Small Business Risk Checklist:

* Contingency plans for every occasion - On your way to a major client meeting with a Powerpoint presentation? What will you do if the projector doesn't work?
* Pay attention to quality control -- keep lawsuit risk low
* Take health and safety seriously -- your future depends on it
* Make sure you get good advice before starting disciplinary proceedings against en employee or making someone redundant
* Invest in a decent burglar alarm and take up telephone references on those you employ
* Get a fire-proof, immoveable safe - and use it
* Ensure backups of vital data are on a rotating basis onto different media every day and stored in different places - not all in the office
* Consider advance lenders agreements to assist cash flow by borrowing against signed contracts or issued invoices
* Consider factoring arrangements where you get paid on your invoice and a collecting agency takes a commission to cover the risk that they won't get paid back
* Make sure you have proper small business insurance cover and have read all the exclusions carefully

Reduce Small Business Risk

* Eliminate the activity altogether
* Change what you do to reduce risk
* Limit your investment exposure
* Create contingency plans
* Manage proactively to minimise losses

Small Business Insurance Policies

* Most businesses need several different policies or kinds of cover eg:
* Workers compensation / employers liability insurance
* Auto insurance
* Commercial property insurance
* Equipment breakdown insurance and service agreements
* Commercial public liability (general liability) insurance
* Professional liability insurance
* Crime insurance (theft, arson, malicious damage)
* Business interruption insurance

 

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