Review, don’t just renew
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- Published Date
- Written by Mike Garner
It is very important not just to renew your insurances each year – but to review!
The reason you have insurance is to protect your business, partner, children, home or lifestyle. If the unthinkable were to happen - would your insurance provide enough resource to:
• keep your business alive?
• safeguard your family's future?
• pay off your debts?
It is very important to keep your insurance broker up to date with any changes in your circumstances. It is important to not only renew your insurances each year – but to review your insurances each year.
Why should you review annually?
The answer to this question is because circumstances change:
• you may have started a new business
• you may have taken on a business partner
• your business debt may have increased/decreased
• the value of your business may have increased
• you may have got married
• you may have had a baby
• you may have purchased an investment property
There are many more reasons than just those mentioned above, but I am sure I have made the point.
I read an article in an industry magazine recently that stated that underinsurance was a huge problem in Australia with 80 per cent of businesses thought to be underinsured by at least 10 per cent. I am sure that these statistics could apply just as easily to New Zealand.
The recent spate of natural disasters has thrown fresh light on the issue of underinsurance for businesses, not to mention personal insurance. No doubt the experience of the Christchurch earthquake has made New Zealanders more aware of the need for insurance. We do know that a number of the people who lost their lives in Christchurch had either no insurance at all, or not enough. A recent survey conducted by Cigna Insurance found that 36.4 per cent of New Zealanders have no life insurance, with the figure split evenly between those who believe they should have cover but don't and those who believe they don't need it at all.
There are many reasons why businesses are underinsured. Sometimes the business owner thinks the purchase price of an asset is the same as the reinstatement value, sometimes they think they know the true replacement value of an asset when they don't, sometimes they assume last year's declared values are still correct when they're not and quite often business owners simply don't want to pay the cost of insuring properly.
One of the biggest things that can be done to help solve the underinsurance problem is to pay for an accurate valuation so that there are no nasty surprises at claim time.
Another big issue is the hidden costs that are incurred after a loss. These can include access difficulties, heritage issues, lead times for demolition, legal and professional fees, site conditions and zoning restrictions, which can have a huge impact on the cost and are factors of which building owners and businesses are often unaware.
Another area of concern is inadequate or lack of business interruption cover – this sometimes can be the sole reason many businesses don't survive a major loss. For example, when a disaster strikes, a business may have to let key staff go because they can't pay them. Then, when the business is ready to re-open, these skilled people have found other jobs. If machinery is covered for breakdown, but not business interruption, there is no cover for lost turnover while a machine is being repaired or replaced.
Be certain that your cover allows enough time after an incident to clear up, complete the design process, consent process, to find tradesmen, order and receive any specialised plant or equipment, to test and commission it, to rebuild assets, to regain lost customers and lost orders and to return to the profitability enjoyed before the event.
Here is a scenario where business interruption insurance lessened the impact of a disastrous event on the owner's motel. I have taken this example from "The Specialist" newsletter published by QBE in 2009.
A rainstorm floods a motel
The roof and ceiling of a motel were in the process of renovation and repair when a heavy rainstorm accompanied by high winds occurred.
At the time of the storm, contractors had been on site for about one week of a four-week repair period. The motel was still able to fully operate while the repairs were undertaken. The motel's insurers had been advised of the repairs and had agreed to continue the material damage and business interruption cover for an additional premium and increased excess.
When workmen finished work on the Friday they covered the roof with tarpaulins, which they fastened securely and taped up, as the weather forecast had indicated stormy weather over the weekend. Torrential rain two nights later caused significant water damage to the motel. An insurance assessor was called in.
Due to this significant water damage from the storm, parts of the motel's internal walls had to be stripped out and re-clad. Floors, carpet and fixtures and fittings also had to be replaced. Council consent had to be sought for the construction work and other changes had to be made for the motel to meet the requirements of the current building code.
The process of rebuilding the motel took five months, which was just within the insured's indemnity period of six months. However, the issues that arose during the rebuilding process meant the motel owners did not know when they would be able to re-open their motel. They missed key advertising publication deadlines for the coming summer holiday season as a result. Loss of goodwill due to cancellations and turning away business meant that it took almost 12 months after the storm before the motel was back to its pre-loss occupancy rates and profitability. So for the last six months they had to bear the shortfall in revenue instead of their insurer."
If you value your business and your financial security, you need to be certain you are not underinsured.
One way to do this is to make sure you meet with your insurance broker annually – businesses that use a broker are more likely to be properly covered than those that don't use a broker. There is a key role for a broker to play in educating and advising about the different risks faced and the solutions available.
If you review your insurances each year, not just renew your insurances, the chances of problems rearing their ugly heads at claim time will be greatly reduced.
