By Leigh Smith
As a retailer, regardless of whether you own a small corner shop or a large car showroom, you are exposed to a considerable range of risks.
Some of these risks probably spring straight to mind: burglary, fires, stock damage and glass breakage, for example.
However, some aren’t as immediately apparent: the loss of income due to trading interruptions or injuries to members of the public, for instance, are serious risks to any retail business.
You probably have insurance to cover some of those risks. But can you say for certain that you are protected from all of them?
If you can’t, you’re not alone. Around 70 to 80 per cent of all Australian businesses are underinsured to some degree, whether they’ve left some risks uncovered or have undervalued the amount of cover needed.
These are some of the key covers you should consider to protect your business.
Protecting against damage
One of the most important covers for any retailer is Fire (also known as Property Damage). These policies cover the cost of repairing or replacing damaged contents or property after a range of events. Aside from fire damage, it also covers damage caused by storms, earthquakes and riots, as well as malicious damage and accidents, such as, a car crashing into your shopfront.
Fire/Property Damage cover comprises two separate policy components: Business Contents and Stock, and Buildings. Business Contents and Stock includes all of the items you keep on your premises in order to do business, including equipment, such as cash registers. If you are leasing your shop, this will cover most of the items that you bring onto site.
If you own the premises, you should also have Buildings policy to cover the actual property from damage. It works in a similar way to a domestic home insurance policy. However, if you are a tenant and your lease agreement specifies that you are liable for fixtures such as blinds, carpets and air conditioners, you should include these in your Business Contents and Stock cover.
As a tenant, you may also be required to cover the building’s glass windows, for which you will require the specialised Glass cover. This policy covers the replacement of broken glass windows and countertops, as well as some toilets and wash basins, from events such as burglary, malicious damage and accidental breakage.
One of the other key policies to consider is Business Interruption, which covers the loss of income after an insured event. While your income may stop after a loss, many expenses will continue and it can be months, or even years, before you’re back to your old level of turnover. Even a small amount of property damage can cause significant disruption to a business’s cashflow.
Most Business Interruption policies will also respond to events such as break-ins or hold-ups and on top of that, it can cover the impacts of indirect events. For instance, if a cyclone in North Queensland destroys a supplier’s warehouse full of tropical fruit, grocers in Melbourne can be covered for the loss in income even though they were nowhere near the event.
Protecting against underinsurance
Despite their importance, Fire and Business Interruption covers are two of the most commonly underinsured by business owners.
For Fire policies, problems can arise when the level of cover is too low. It is crucial that you insure for the total cost of replacing all of your stock, contents and property.
For example, if you insure your stock for $100,000, the policy assumes that this is the total replacement cost if you were to lose all of your stock. This often includes costs such as clean up, architect fees or new council requirements on rebuilding.
Many owners decide to insure below the total replacement cost, reasoning that it is unlikely they will lose all of their assets in one event. They also assume, incorrectly, that the full amount they’ve will be available after an event.
To illustrate what can happen, imagine you cover your stock and contents up to $100,000. If this is the correct total replacement cost, then your business will be adequately covered. However, if the actual replacement value is $200,000, you’ve only insured for half of the cost of replacement.
This means you’ve elected to share half the risk and, therefore, half the cost of replacing any damage.
Almost all commercial insurance policies include an ‘Underinsurance’ or ‘Average’ policy condition that applies when the sum insured is a certain amount below the actual replacement cost.
This normally kicks in when the insured amount is less than 80-85 per cent of the actual value, depending on the specific policy. This condition will reduce the claims payout in proportion to the amount the property is underinsured.
Let’s continue with this example of a business with cover up to $100,000 and a total replacement value of $200,000. Now, imagine you lose $40,000 worth of stock after a fire. Many owners would assume that you will receive the full amount, because you’re covered up to $100,000. However, because you’ve elected to take on a proportion of the risk – half in this case – you have agreed to cover the corresponding proportion of the cost of replacing the stock – $20,000, in this case.
Business Interruption works in a similar way. When nominating the level of cover, it is important that you insure up to the full amount of what you would be earning under normal circumstances. If you cover less, and you could be electing to share a proportion of the risk and potentially compound your losses if an event occurs.
These can be costly miscalculations, even for established businesses. It’s certainly not worth the minor savings you’ll make to the premium.
Leigh Smith is the senior leader of commercial portfolio at GIO.