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    In case of emergency

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    strong>It’s true that most business owners live and die by their own risk-and-reward equation. Craig Scutt explores why so many Australian entrepreneurs forget the insurance parachute on their flight to the top.

    Risk and success go hand in hand. After all, the bigger the risks, the greater the rewards. But how much risk is worth taking? For a significant number of Australian business owners the answer is: “Quite a lot.”

    Let’s start with SMEs. According to the Australian Bureau of Statistics 2001 Small Business Survey, roughly one in six small businesses have no insurance. That’s around 200,000 businesses, including sole traders. Add to that figure a further 17 percent that are under-insured, and it’s clear a significant number of SMEs are dicing with disaster.

    WHEN THE SIREN WAILS

    Many entrepreneurs evidently get through each day by repeating the mantra “Don’t look down. Don’t look down.” It’s easy to occupy one’s self with minutia, but for those given to moments of reflection, cautionary tales abound.

    Following the launch of his nudie drinks brand in 2002, Tim Pethick achieved an annual sales turnover of $12 million by May 2004. Then he got the call every entrepreneur dreads.

    “I was out for dinner and was contacted by a colleague to say the fire alarm had gone off and the fire brigade was at the factory,” says Pethick, “Funnily enough, I didn’t take it that seriously. We’d suffered a fire earlier in the year, which I’d taken extremely seriously, and although it had been pretty spectacular it hadn’t done too much damage.

    Upon arrival at the factory he found the surrounding area had been cordoned off as “multiple fire engines” struggled to get the inferno under control. The fire brigade managed to do so but only after the nudie factory, offices and distribution centre were obliterated.

    “At first you don’t really believe it’s happening,” says Pethick, “but you have to quickly regain focus. At one point in the night the fire brigade said it looked like there was going to be significant damage. My marketing director at the time turned to me and asked, ‘What do we do now?’ I said, ‘Well, we start looking for another factory in the morning.’”

    In addition to Pethick’s never-say-die attitude, having the right type of insurance was vital in helping to resurrect nudie from the ashes. Nine months before the blaze, Pethick had taken out business interruption coverage through a broker.

    “The first thing we did was call our broker, who convened a meeting with representatives for the three primary underwriters. The meeting was held onsite the morning after the fire.”

    ATTENTION TO DETAIL

    Looking back, Pethick now believes that precaution is better than a cure.
    “I guess what I’ve learned from the whole experience is that the time you need to be focusing on insurance is obviously before a claim happens,” says Pethick, who admits his attitude has changed in the wake of the fire.
    “I now pore through my insurance schedules with vigour each renewal. I also keep meticulous records of things that I’m insuring, such as when and where I bought them, and I also take photographs, which are stored on a secure server,” he says.
    “I think for most small businesses, and certainly most start-ups, insurance might be a tick in the box sort of thing. You charge around, get the cheapest policy and file it in a filing cabinet somewhere,” says Pethick, “It actually requires a whole lot more thought and insight than that.”


    YOU GET WHAT YOU PAY FOR

    According to Kevin Cleland, NRMA Insurance veteran, most problems arise due to the ad hoc way many SME business owners view insurance cover.
    “Insurance, to many, has always been (and I think it continues to be) a bit of a grudge purchase. Underinsurance or no insurance can be the result of ‘unaffordability, be that real or perceived’. I’d argue that if a business owner can’t afford insurance, they can’t afford to run a business.”
    Cleland has over 30 years of experience insuring small businesses at NRMA Insurance. For him, risk management should be a day-to-day concern for business owners, who often place more importance on compliance and taxation obligations than on mitigating the risk of loss within a workplace (in terms of both prevention and recovery).
    “Budgeting for insurance is only half the game,” says Cleland. “Spending that money wisely and being aware of your risk is vital.”
    “Some of the consequences of ignoring or failing to properly identify and manage risk within the new business venture can include personal injury, property loss or damage, loss of trade, law suits, adverse publicity, financial ruin and, in the worst case scenario, it may result in a jail sentence.”
    Particular importance should be placed on the cover for a loss of profits/business interruption, including provision for ongoing business expenses.
    Cleland presents the following scenario: “Consider this: you have a hairdressing salon in a major shopping centre. A business five doors away has a major fire, albeit confined to that shop. Your business is not physically harmed but the fire brigade declares the area unsafe for three months. How do you survive? Who pays the rent and other ongoing charges? Without business interruption cover and without the right amount of cover, you could lose your customers, you could lose your staff and you could lose your business and any securities you put up to finance your business in the first place.”
    It is imperative that business owners constantly review the value of assets and review the risk management process on a regular basis.
    “When increased volume of stock is purchased, increase insurance sums insured,” says Cleland. “Be vigilant and ensure that the workplace and surrounds are safe and secure. Paying particular attention to protecting the public as well as workers from injury is considered an imperative.”
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    ROLLING THE DICE
    In 2002, a survey conducted by Quantum Market Research on behalf of the Insurance Council of Australia found that “70 percent of uninsured and under-insured small businesses affected by a major event – such as a legal claim against the business, earthquake, fire or storm – don’t recover.”
    Gerard McDermott, small business manager at GIO Insurance, finds that figure disturbing. “Given how important a small business is to its owner, I find it quite staggering that there are such high levels of under-insurance to protect and preserve the ongoing viability of that business.” However, McDermott does accept that business owners are sometimes wary of the advice they receive from insurers, who can be perceived as trying to get them to take out more expensive policies than required.
    “One of the traps a lot of business owners fall into is that they tend to insure only what they can see,” says McDermott, “As an example, there was a guy who came to us for advice who had just re-mortgaged his home to set up his own bicycle retail outlet, which he bought freehold. It was the lead up to Christmas and the store was fully stocked with bikes and expensive equipment. When he organised his insurance he made sure that all the business assets like stock and property were insured, but failed to consider what expenses wouldn’t go away if he were immediately forced to close the business.”
    The decision saved him around $800 in premiums but later cost him his business after a fire spread from a neighbouring shop and burnt down his premises containing all the stock.
    RIDING THE ODDS
    John Myler, General Manager for Direct Insurance at Allianz Australia Limited, says approximately one in 16 small businesses with insurance will incur a claim. The average claim value is around $3,500. The top five claims in 2006 related to glass (average loss $1,500), fire and perils ($6,700), burglary ($5,400), liability ($8,050) and machinery breakdown ($2,400).
    Of course, it’s not only small businesses that need to plan for
    the unexpected.
    Shortly before Christmas 2004, the biggest heist in British banking history saw £26.5 million swiped from Northern Bank’s vaults in Belfast, Northern Ireland. It soon emerged that the bank’s owner, National Australia Bank, had no insurance coverage for
    the incident. Three years on, less than £5 million has been recovered. As a spokesman for NAB said at the time, “The theft is covered by self-insurance, and as such, National Australia Bank … will bear the impact of any losses arising from the theft.”
    DO YOUR HOMEWORK
    Seeking advice about the insurance options available is essential for anyone who is considering taking out a new policy. The larger insurers, such as NRMA, Allianz and GIO, offer business insurance direct to the customer without having to go through a broker. If the local Business Centre is your first port of call then you will most likely be referred to the National Insurance Brokers Association of Australia (NIBA). As the industry’s peak body, NIBA regulates its members through a strict Code of Conduct. The first testament in the Code is that members must always “act in the best interests of the client.
    ”Ross Dahlstrom, manager at Greater National Group Insurance Brokers, says brokers exist to service clients’ needs and answer questions before and during the life of a policy. He says that on top of the bewildering assortment of standard policies available, virtually any insurance requirements can be met. “It’s just a matter of paying the price.”
    According to Dahlstrom, the key is to make sure you’re dealing with a reputable company – something brokers are uniquely positioned to know.
    “Another thing to watch out for is that you are dealing with an Australian-based insurer rather than an offshore insurance company, which wouldn’t have to comply with the Australian Insurance Act in the event it goes out of business.” Ultimately, when it comes to taking out business insurance coverage, business owners only need to answer the following question: Are you prepared to pay the price now, or will you pay the greater price later?
    ARE YOU AFRAID?
    • 84% OF BUSInESS OwnERS FEAR ThAT ThEIR wIll ExPERIEnCE CRIME AT SOME STAGE
    • 60% SAId ThEY hAvE AlREAdY ExPERIEnCEd CRIME, whICh:
    • 50% BURGlARY
    • 43% vAndAlISM And/OR GRAFFITI
    • 63% ShOPlIFTInG
    The Omnibus Small Business Survey, February 2007
    REDUCING THE RISKS ASSOCIATED WITH FIRE AND PERILS
    • Remove all loose materials and debris from aroundwindows and display settings

    • Maintain all appropriate fire detection and protection devices throughout the business, especially near circuit boards and powerpoints

    • Ensure delivery areas are well illuminated and lanes clearly marked

    • Ensure all cash register draws are emptied each night and left open

    • Regularly service all machinery

    • Regularly clean out gutters and awnings. A build up of leaves can provide fuel for a fire and  also cause water overflow damage during rain

    • Consider a ‘Back to Base’ alarm to ensure an immediate response to fire, burglary and other events – especially if owners are away from their business premises for an extended period of time.

    * This list provided by Allianz Australia Ltd

    Over one in two retail businesses have experienced crime, while a half of those have been burgled, according to The Omnibus Small Business survey. Yet there are some simple things all businesses can do to help reduce the likelihood of them becoming a crime victim, according to NRMA Insurance.

    According to Head of NRMA Business Insurance, Llewellyn Jones, installing deadlocks and keyed window locks are the most important security measure any business can take.

    “These measures not only help stop thieves getting into your premises, they also help prevent thieves from easily removing goods if they do break in. People mistakenly avoided installing deadlocks because they were concerned this would stop them getting out of the building in the event of a fire. But there are deadlocks readily available that you can deactivate when you are in the premises enabling you to open the door without a key in an emergency.”
    According to Jones, the need to take sensible precautions is just as important as making sure that your business has the right insurance cover to meet your needs in the event of an incident.
    “Our research shows that 47 percent of businesses have not adequately insured their stock and contents. Many have their stock and contents valued at depreciated levels when it will cost them more than that to replace these assets, while many also forget the additional costs of making the replacement.”
    NRMA Insurance holds regular BizSafe seminars in NSW and QLD, to provide important safety tips on how to prevent crime at a business. BizSafe is a NSW Police Crime Prevention program supported by NRMA Business Insurance, and the seminar is free. The program is all about increasing awareness of effective crime prevention principals and fostering good working relationships between local businesses and police.
    To check out the location and date of your next local BizSafe seminar, visit: www.nrma.com.au/bizsafe