The Necessity of Insurance

In the first of an engaging and pertinent series, John Bourke of Thompson Insurance writes about both the importance and obligation of insurance cover, as well as making the crucial decision concerning the correct insurance for your business.

During the recession, many businesses decided not to renew their insurance policies. Unfortunately, in some cases that decision was disastrous, as they suffered a property loss or a claim from an employee or a member of the public, did not have the money to deal with the loss, and subsequently ceased trading or worse. Now, as the economy picks up, we are seeing an increase in the number of commercial insurance buyers, but we are also seeing an increase in the cost of third-party claims. That sore topic, however, shall be dealt with in a later entry in this series.

Notwithstanding the fact that third-party motor insurance is a legal requirement, there are also four key areas of insurance cover that all businesses must have:

• Property Damage (buildings, trade contents, and stock)
• Business Interruption (loss of profit due to reduced turnover following damage caused by an insured peril – e.g. Fire)
• Employers Liability
• Public/Products Liability

Additional important covers are available, although they tend to be more specific to the business in question:

• Money
• Goods in Transit
• Personal Accident
• Computer Protection
• Cyber Liability
• Directors and Officers Liability

The first thing is to decide what cover your business needs. The second thing is to insure adequately. Businesses have gone to ground because they have under-insured their Buildings, Contents, Stock and Gross Profit, thereby only receiving a portion of their loss. This is known as the “average clause” and it works as follows: Patrick Smith insures his hardware shop building for €500,000. The actual rebuilding cost is €1,000,000. Patrick is therefore only insuring 50% of the exposure. Patrick suffers a fire, and the damage to the building is €300,000. Because he is only insured for 50% of the rebuilding cost, he is deemed to self-insure only 50% of any claim. Therefore, instead of getting €300,000 from his insurance company, Patrick will only receive €150,000.

Unfortunately, this problem is all too common, with businesses unable to recommence trading because of under-insurance. Equally, it is important not to over insure, as that is simply a waste of money.

Nobody wants to suffer a loss that results in an insurance claim, but – when buying cover – a business owner should always be aware of the following:

• All Property, except stock, should be insured on a Reinstatement Basis (i.e. the cost of replacement as new, and NOT the booked value).
• The Average Clause also applies to the Business Interruption cover under the policy. A business should insure against loss of gross margin due to being unable to trade, or seeing a reduction in trade following loss by Fire, Flood etc. Put simply, the gross margin is turnover less the cost of stock purchases out of which the business pays its expenses (i.e. salaries, rates, insurance, bank repayments etc).
• Under the “Liability” sections, a business will be asked for Projected Wages (by category of Employee) and Turnover. These must be realistic, as an under declaration could invalidate the policy cover. These policies are often subject to declarations at the end of the insurance year. Therefore, if the actual wages and turnover declared exceed the projected figures, this can result in a demand for further premium known as a “premium adjustment”. The point is that accuracy is important when providing your current insurer – or any potential future insurer – with these figures.
• All material facts must be disclosed, with the onus being on the proposer at inception, and the policyholder at renewal, to divulge any information that might influence the insurer in their decision to either accept or renew the risk.
• It is imperative that – should any incident occur which might give rise to a claim – the insurance company is advised immediately, and a full record is noted along with witness statements that were taken at the time. Too often, policyholders don’t advise insurance companies of incidents that have occurred, and only react when the solicitor’s letter is received. The Statute of Limitations allows a claim to be presented up to 2 years after the date of incident. Memories fade, and witnesses are no longer available, hence prejudicing the insurers position and often resulting in a refusal to deal with the claim due to late notification.

Insurance companies and brokers provide a very valuable service, and businesses could not operate without the protection they both provide and advise on. Remember – when proposing for insurance – that the customer knows everything, and the insurer knows nothing, so insuring accurately and adequately is down to the provision of information by the proposer.

For more information or to seek advice, call Thompson Insurances on 01 4817728.

This Business Support article featured in the March/April 2018 edition of The Hardware Journal.