These follies can wipe out profits and slow growth

Produced in partnership with Quotedesk

So you’re an entrepreneur running a successful business in London. The cash register’s ringing non-stop, you’ve smashed your sales targets and have your eyes set on new international markets.

But have you considered risks that can rain on your parade? Of course you have. You bought insurance covers on day one.

But are the policies comprehensive enough to cover your fast-growing business?

Nigel Palmer, director, Quotedesk, says that one of the biggest risks businesses take is buying insurance policies and not reviewing them as the business grows.

“Common insurance mistakes can wipe out profits and slow growth,” he says.

“All businesses are different and a detailed review will not only help to ensure that a business is adequately insured, but also the business will have a better idea of what they are actually insured for.”

Here are eight common insurance mistakes businesses make:

1. No regular reviews of insurance policies

The sums you insure at the beginning of the year can be very different by end of the year. Your stock investment, machinery or property will have changed. You need to be up to date with your insurance requirements.

Malcolm Tarling, spokesperson, Association of British Insurers (ABI), says it’s very important for every business, regardless of their size, to regularly review their insurance cover to ensure that their business insurance keeps pace with the growing and changing nature of their business.

“Most business insurance is arranged through an insurance broker, who will be able to advise on the insurance cover that the business needs. While there are package commercial insurance policies available, as no two businesses are the same, bespoke cover can be arranged to meet individual needs. The covers can range from a small enterprise employing a couple of people to a large multinational firm,” he says.

As your business grows, your insurance requirements grow. Businesses should watch out for making the mistake of assuming the existing insurance policies may cover everything you’ve added to your business. It’s vital for businesses to ensure they keep their insurance broker informed about new investments to ensure you’ve got the right cover for your assets.

2. Not seeking guidance from you broker when selling to different markets

A lot of businesses now consider selling online and going global as key ways to expand their businesses. Graeme Trudgill, executive director, British Insurance Brokers’ Association (BIBA) points out that businesses often overlook risks lurking around.

“What if you website gets hacked into? Or what if you have trouble getting a payment from an overseas contract?

“As businesses may start to sell to different markets – over the internet or overseas, these all bring new risks which should be discussed with your Insurance broker. If you’re exporting abroad, your business faces risks like not being paid for unforeseen circumstances,” he says.

3. Under-insuring their business – not having the right level of business interruption insurance

Palmer of Quotedesk points out that when it comes to business interruption, most businesses take a view on what could happen only in a year.

“It’s beyond a year where it can be difficult to predict what could happen. That’s why it’s important to work with a broker and go through each area of a business’ expense which will or will not continue if there is a business-crippling event,” he says.

The 2011 riots were a classic example of how businesses burnt their fingers because of being under insured, says Trudgill from BIBA. 

“A business affected by the riots took a default period of 12 months for business interruption insurance. However, it took a six-month consultation period for their claim to come through. This meant they couldn’t operate in that period. Had they applied for a two-year insurance, they would have had more losses reimbursed.”

4. Not obtaining evidence as soon as an incident occurs

A common mistake businesses make is not collecting enough evidence when a workplace accident occurs. This reduces the chances of getting a successful claim.

According to Alan Davies, partner at Pitmans LLP Defendant Insurance department, in the event of a work place accident businesses need to investigate and produce an accident report to send to their brokers/insurer.

His guidance? “Make sure evidence from those involved is collected as soon as the incident occurs. Prompt action will help insurers in their investigations if a claim arises and help reduce prospects of a successful claim being established if evidence is available to refute later allegations by the claimants.”

5. Misunderstanding the definition of gross profit

One common misunderstanding is that an insurer’s definition of gross profit is the same as an accountant’s definition of gross profit. 

Businesses that insure against business interruption on a gross profit need to understand that it is not an accountant’s definition of gross profit that they need to use.

An accountant’s definition of gross profit does not include the wages paid to staff, whereas for the purposes of insurance, you must include your annual wage roll in your gross profit calculations. Not paying your staff during such a difficult time for the business would affect productivity and future of a business.

Quotedesk’s Palmer says, “In the event of a loss when your operations are interrupted, a business must ensure that it is compensated for the net profit it cannot earn, plus the costs that will continue to be incurred during the period of interruption.”

6. Reducing cover when times are tough to reduce premiums

During the financial crisis, a number of businesses reduced their covers to cut costs. While it’s essential to choose between the “nice-to-haves” and “need-to-haves”, businesses should appreciate the importance of having the right cover for their business.

“One of the first few things when looking at cutting costs is to reduce covers. While this does help in the short term, business may find themselves in difficult situations if they don’t have adequate cover,” says Trudgill.

7. Not understanding endorsements and warranties and their implications

It’s very easy to get lost in rafts of documents detailing the implications of your insurance policies. However, it’s important for your business to understand the small print and be prepared for implications of your policy. A good insurance broker will help you understand the nitty gritty of your insurance policy.

8. Being your own insurance broker

Believe it or not, Google doesn’t have the answer to everything. Businesses should take professional help to get protection for their business. It’s easy to take up insurance offers online that are cheap but they may not be comprehensive enough to safeguard your business.

ABI’s Tarling thinks says your insurance broker has a key role to play in ensuring your business runs smoothly.

“An insurance broker will help ensure that the level and scope of insurance cover in place is adequate for the needs of a business.”

Produced in partnership with Quotedesk

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