Insuring your business

Taking the risk out of running a business

Source: You and Your Rights>

All businesses – from the biggest to the smallest – run the risk of incurring unforeseen losses. For instance, a grocer may lose stock in a flood, a factory may be destroyed by fire or a tailor may lose materials in a burglary.

Total catastrophe can often be avoided if your business has been adequately insured – and in this respect most insurers offer a special package for persons in business or a ‘multiperil’ policy that affords wide protection under a single policy in a variety of circumstances. For example, the package for a business person can cover your business against fires, lightning, earthquakes, explosions, burglaries, riots, strikes, labour disturbances, malicious acts, storms, floods, impact by a vehicle or aircraft, or anything dropped from an aircraft. Multiperil policies can also include cover against some or all of the following:

Warning – Insuring against riot damage

Individual insurance companies will not, as a rule, insure you for damage that may be caused by riots or civil commotions that are politically inspired. This type of insurance can be obtained through a sasria (South African Special Risks Insurance Association) policy.

With a sasria policy, the insurers are obliged to provide cover if certain prerequisites are met. A sasria policy covers direct but not consequential loss. For example, where a factory is burnt down in a politically motivated riot, a sasria policy will cover the loss incurred through physical damage to the factory, but will not provide compensation for profits lost as a result of the damage. Multiperil policies also exclude any damage suffered during times of war.

PUBLIC LIABILITY Everyone in business risks claims for damages by the public. For example, a manufacturer may unwittingly sell contaminated food and be sued for damages, or a builder may accidentally drop equipment on a person or on someone’s property. Public-liability insurance would meet such claims.

EMPLOYER’S LIABILITY Insurance against liability for death or injury to employees is provided by the workers’ compensation system, which is compulsory cover for many employees. But because payments under workers’ compensation are often small compared with the hardships suffered, an employer may widen or increase the cover for injury to employees with a business operator’s package. In cases where workers are not covered by workers’ compensation, a personal accident stated-benefits policy will give an employee a limited amount of cover for death or injury.

MONEY In terms of a multiperil policy, limited insurance cover can be obtained for the theft of money, postal orders, cheques or stamps – provided the theft is reported within a certain time. Money that is regularly taken to and from a bank or post office or held by collectors should also be insured.

CONSEQUENTIAL LOSS When business premises or stocks are damaged or destroyed, the loss (in terms of disrupted trade or lost orders) is not always made good by repairs or replacement. Consequential-loss insurance offers cover against these effects. In fact, some insurers also meet the extra expenses incurred in trying to get business operations back to normal. This is also called loss-of-profits insurance.

FIDELITY GUARANTEE Pilfering of money or stock by staff can be compensated by fidelity-guarantee insurance. This can be restricted to particular groups of employees such as cashiers, or it can cover the entire workforce.

PLATE GLASS Shop windows and glass doors are often expensive to replace. Plate-glass policies usually cover accidental damage only. Cover against damage through burglary and vandalism can be arranged under fire and burglary policies.

Taking precautions

A premium can often be reduced if you take proper precautions: for instance, you may be able to cut down the cost of insurance by installing a sprinkler system or some other form of fire-extinguisher on your premises.

Against the public interest

Insurers will normally decline proposals for anything that is not in the public interest. For instance, if you were the licensee of a bar, you would have no difficulty in insuring against losing the licence through circumstances beyond your control, such as the actions of an employee. You would not, however, be allowed to take out insurance against losing your licence through your own behaviour – for example, because of dishonesty or drunkenness.

Keeping the insurance up to date

It is essential to bring the policy up to date immediately circumstances change – to cover increased stock, for example.

Other business risks

A number of other business risks can be covered by insurance, including:

KEY PERSONOften the knowledge, ability or skills of a single person may be vital to the survival of the business. His or her death, or disability, could result in financial ruin or a serious setback.

The solution would be to take out a policy on the key person’s life, so that the financial consequences of his or her death (or total disability) are covered. The size of the policy will depend on a number of factors, including the cost of replacement, the effect on incomplete orders and the loss of goodwill.

The calculation of this amount and the proper application of the assurance must be done by a specialist life-assurance consultant who has knowledge of accounting, income tax and estate duty – all of which have a direct bearing on the transaction. The annual cost could be between one and four per cent of the sum assured and this is often tax-deductible.

Warning – Be careful not to underinsure

Because there is always the possibility of underinsuring with a multiperil policy, you should discuss the matter with a reliable insurance broker. You may find yourself being paid only a limited amount on a claim if you do not agree on writing specific sums or circumstances into your policy.

Insurers always stipulate that property must be insured to its full value, except in a few special cases such as insurance against agricultural risk.

Most policies contain an ‘average’ clause, which means that, if your property is not insured to its full value, your insurer is likely to regard you as responsible for the balance. This is called the rule of average and means you will have to carry a pro rata share of any loss.

Say, for example, you insure your stock worth R5000 for that amount, but during slack period deliveries of additional stock arrive before earlier consignments have been sold. As a result, the total value of stock on your premises rises to R8000. Unless you increase the insured amount (and therefore the premium payable), you will be insured for only five-eighths of any loss.

Your insurer should also be told of changes that affect the policy – for example, if you start storing flammable goods in a warehouse that was previously used for ‘safe’ stock.

PARTNERS AND SHAREHOLDERS People who enter into a business together usually have the bulk of their assets in the venture. The death of one of them will result in a call from the executor of this person’s deceased estate for a payment of the value of his or her share in the business. The partnership agreement, or the articles of association of the company, usually give the remaining partner(s) or shareholder(s) the first option to buy the interest, or shares, of a deceased partner or shareholder. The surviving partners or shareholders have to pay the deceased estate out of the after-tax money in settlement of its claims.

If payment is protracted, the business may be faced with having to support what amounts to a non-working partner. A similar problem occurs if a partner wishes to retire or a shareholder wants to sell his or her shares.

The solution is to have a buy-and-sell agreement in terms of which the survivors are compelled to buy the interest or the shares of the deceased person at a specified price (or formula), and to fund this with life assurance. Each life assured neither owns the policy on his or her own life nor pays the premiums.

The investment in this assurance, if it is correctly done, will provide for a number of contingencies – for example, death, disability, and retirement. Because the agreement between the parties is the vital factor – and because of the tax and estate duty implications involved – it should be drawn by an attorney who specialises in business agreements.

Before selecting an intermediary, ask your business associates to recommend someone. While the Institute of Life and Pension Advisers can provide a list of people who have qualified in this area by examinations, many highly skilled persons have elected not to follow this examination route.

The person selling the assurance will offer considerable advice, frequently without charge, depending on the commission he or she obtains from the assurer. It is, however, possible to pay the seller a fee for the advice and place the commission-bearing assurance elsewhere. However, this will increase your expenses.

PERSONAL ILLNESS, INJURY OR DEATH Insurance companies offer personal-accident policies for small premiums. These cover you for unexpected medical expenses and loss of earnings should an accident stop you from working. Such policies also cover you for any permanent disability, as well as the risk of being prevented from working through injury.

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