The pitfalls of not understanding business insurance were laid open by research from the British Chamber of Commerce and AXA in a survey which revealed many businesses were cutting back their cover and leaving themselves and employees vulnerable.
 
 

During 2009, 36,200 businesses are predicted to fail, but having appropriate insurance can help protect a business from becoming one of the statistics. In August 2009, AXA joined forces with the British Chambers of Commerce (BCC) to assess the state of business insurance among 322 British employers across a range of sectors. This research revealed a number of key issues, most worryingly the lack of understanding of what business insurance is, and the temptation by employers to cut back, or even cut out insurance altogether, to save money.  The research indicates that potentially over half a million employees may be uninsured in their workplace.

The average claim cost for the three most common types of business claims are £3,500 for theft, £36,000 for fire and £49,000 for business interruption. These amounts could mean the end of a business without insurance in place.  Other key shortfalls are in Employers’ liability insurance and motor insurance with respect to company vehicles.

Employers’ liability insurance
Employers have a legal obligation to have employers’ liability insurance. However, the AXA/BCC research reveals that only 34% of employers understand that employers’ liability insurance is a mandatory requirement. Employers can be fined £2,500 for each day they are without employers’ liability insurance. 

Businesses are not good at informing their employees of the insurance in place as over a third of employees (36%) have never been given any information about their employer’s liability insurance.  As a responsible employer, businesses must inform their employees of the employers’ liability insurance in place by displaying the certificate publicly and electronically. 

Motor insurance
Only 11% of employers understand that if a company van or other vehicle is made available to employees then the employer is legally obliged to insure it.   The average cost of an employers’ third party motor claim is around £8,000. 

Understanding the detail
The research indicated that there is a clear need for businesses to become better informed to enable them to make the right decisions about their insurance requirements.  Businesses’ understanding of their legal obligations is poor, with nearly two-thirds of businesses not understanding that employer’s liability insurance is mandatory and 15% wrongly thinking that business interruption is legally required.

Businesses should also understand what they are covered for, and whether there might be gaps in their insurance. Only 16% of businesses are confident that they understand their policy exclusions while 6% believe they are covered for all eventualities.

Less than half of business owners have read their insurance documentation and 9% would not know where to turn if they needed to make a claim. Only 23% of businesses keep their insurance documentation in a secure filing system.

Be careful if cutting back
Worryingly, when it comes to making cuts to save money, businesses are almost as likely to reduce their level of insurance cover (35%) as to target the company’s tea and coffee (39%). In the face of the current recession, 5% of businesses have already cut back on the level of insurance cover they have.

With 30% of businesses surveyed already having made a claim during the lifetime of the company, and one in nine businesses likely to make a claim this year, cutting back or removing cover should be discussed carefully with the firm’s insurer and/or broker/advisor.

The research indicates that 13% of businesses have less than £1,000 in disposable cash and 47% have less than £10,000 – sums that without insurance would leave a business potentially vulnerable in the event of an incident.  In fact, only 39% of businesses are confident they would even have enough to cover an insurance excess if required.  And many employers hugely underestimate how much an incident might cost them.  Despite the stark statistics around 3% of businesses have no insurance at all, which is concerning when one reflects on the average cost of claims.
 

Guess the claim

• An average claim for business interruption is £49,000: 57% of businesses under-estimated the average cost of a business interruption claim to their business by £20,000 or more.
• The average claim for fire damage is £36,000: 29% of businesses under-estimated the average cost of a fire to their business by £10,000 or more.
• Employers’ liability average claim is £19,000 – 49% of employers under-estimated the cost of an employers’ liability claim to their business by £10,000 or more.

However a business buys its insurance, it is vital that it takes the time to get the insurance cover that suits it best.  This will vary between business type, size, location and the type of work carried out.  AXA recommends that businesses:
 

• Look for a policy designed for the company’s particular industry sector – it is likely to include a package of cover that suits each circumstance
• Understand what they are covered for – take time to ask questions and read the literature carefully
• Regularly review existing insurance provision and identify any gaps – particularly if circumstances change. For example if a company switches from being a sole trader to employing staff, or moving premises
• Use a risk management expert to help meet statutory obligations and identify potential scenarios that might stop the business from operating either fully or partially, and how these might be resolved. AXA works with a number of risk management providers who will spend time visiting a business and assessing specific risk management needs
• Keep insurance documentation safe alongside business continuity plans. Businesses can create continuity plans at no cost using Robust software
• Ensure the level of excess is known and keep this amount readily accessible.