Understanding Insurance
Article by Simon Lenthen, Business Advisor, Western Sydney Business Centre
The government’s business site (Business.gov.au) is an excellent resource for small businesses and has a well written section that introduces the topic of insurance. I recommend all business people to have a look at it. However, it is not comprehensive and quite simplistic. So let’s fill in some of the gaps. In the first of three articles we look at how insurance works. The next article reviews the three types of insurances small business must have. The final article will look at other types of insurance that you might want to get for your small business.
Insurance is where you enter into a contract with another organisation, and that organisation pays an agreed amount, should an adverse event that causes loss, or damage occurs. You pay a premium (an agreed sum of money, smaller than the compensation) in exchange for the promise that the organisation will compensate you in the case of a specified adverse event.
The theory behind insurance is that you will only be paid the amount that restores your wealth to what it was before the event occurred. So if your mobile phone gets stolen, you will get another mobile phone that is equivalent to your old mobile phone. You can’t get an iPhone 7 if you had an iPhone 5. Similarly, the amount of financial compensation you receive will only equal the amount you lost, and not any refund of the premium. So even if you are covered for $50,000 and you lose $5,000 due to fire, you will only receive $5,000. The principle is that you do not gain any financial or asset advantage from the insurance restoration.
Insurance at its basic level is a form of trust. You pay a regular premium to an insurer who stores it until a specified event occurs. Then, when the event occurs, they pay you for the damage caused by the event. The reason why the premium is small is for several reasons. The event might be general enough that it can happen to anyone, and so a small premium shares the risk of the event, amongst a large pool of people. Let’s say you put $5,000 away in case of a small fire. That’s $5,000 that is waiting for a fire to happen. But if you and your neighbour put away $2,500 and the fire only happens to one person, then you have only put away $2,500 but would receive $5,000 because that is part of the agreement. If 10 people said we agree to cover each other should the fire occur to one of us, then you only need to contribute $500. BUT fire may happen to more than one person; and once an event happens, everyone will need to front up another $500 for the next possibility.
Insurance companies do that on a big scale. Using risk assessment and economic modelling, the insurance company can estimate the risk of a damaging event occurring and set a premium for you and others based on that risk and other economic/environmental etc. factors. By covering a lot of people for a damaging event, the insurer will have enough money to compensate those people who have suffered damage. Furthermore, insurance companies will only compensate you to the value you held prior to the damaging event. So it may not be the full amount of cover that you receive.
Our advisors can help you organise your insurances. We can connect you with an insurance broker who will ensure you get the cover you need. Simply give us a call and we’ll be happy to make the arrangements.
Three Must-Have Insurances
Workers Compensation Insurance
Workers Compensation Insurance covers your employees should they suffer an accident at work, or on the way to work depending on the nature of the trip. If you employ somebody, then you have a legal obligation to have workers compensation insurance. Sole traders and partnerships do not have to have workers compensation on themselves as owners or partners in the business, but once an employee comes on board, they must get it. If you have a private company and you are paid a salary or wage from that company, then the company needs to get workers compensation insurance. This cannot be avoided.
Compulsory Third Party Insurance
Yes, even businesses have to pay CTP insurance. This one is a no-brainer, but there are a few issues you need to be aware of. If you are a sole trader or a partner and you use your personal car for work purposes, then you need to advise your insurance company. Firstly, you may be missing out on GST tax credits if you don’t. Secondly, and most importantly, your private insurance does not cover you for work-related travel. The insurance company will refuse the claim because you are not using the car for its stated purpose. Yes, telling the insurance company that you use the car for work related travel may make the insurance more expensive, but you may lose out on the claim.
Public Liability Insurance
While this isn’t a legal requirement, it is a definite must have for businesses. Public liability covers a business should anybody suffer damage during interaction with the business, or the business assets. For example, you are a visiting professional and you leave your briefcase where someone might fall over it, and they do, that person has a right to claim for damages from you because the suitcase was under your care. So if your business is going to have any interaction with the public, then you need public liability insurance.
The Western Sydney Business Centre can connect you with an Insurance broker who will help you organise the insurances you need. Simply phone or email us and we’ll be happy to get you covered.