Construction costs have increased significantly since the carbon tax was introduced, with additional expenses filtering through the building sector from top to bottom. Soft economic conditions have also affected small construction companies, with many owners under-insuring their business against potential losses. A lot of businesses are under-insured, with few owners understanding the ramifications until they make a claim.
For example, a construction company owning a building valued at $3 million but insured for only $1.5 million, will only be able to recover half of the loss when making a claim. If fire or flood causes $500,000 damage the insurance company will provide $250,00, with the business owner expected to make up the shortfall. Many businesses don’t even realise they are not sufficiently covered.
According to Allan Manning, managing director of LMI Group:
“I get these two looks when I explain it to people: First, a look of understanding, then a look of horror, because they realise how much it is going to hurt them.”
Insurance companies have no obligation to replace assets that are under-insured, and recommend that customers check regularly to ensure adequate coverage. Being under-insured simply means that the amount of insurance coverage is less than replacement value or market value. By revisiting insurance policies every year, or whenever the business expands, a business owner can make certain the value of the business is reflected by adequate insurance cover.
Almost half of all Australian businesses have kept their insurance cover at the same rate during the past three years, suggesting that they have not increased cover to reflect rising costs, stock increases or expansion. Increased energy costs, including waste management and manufacturing are in part the result of the carbon tax, and the under-insurance scenario will only be exacerbated for many companies.
The sluggish economy has also resulted in a lot of businesses getting creative in tightening up their expenses. Unfortunately, saving money in the short term by taking out a lower insurance premium is risky, and can result in small businesses folding in the event of an unforeseen insurance event.
For many small business owners, their company is their dedicated income source. The business is often a person’s sole investment and also their superannuation fund. Unless business owners take the opportunity to invest in insurance cover that reflects the value of their holdings, the price in times of need may be more than the business can bear.
The cost of insurance is something that needs to be factored in prior to starting a business. It is also something that requires revisiting on a regular basis as part of long-term business strategy.