Business interrupted: What your small business insurance actually covers

The past few months have dished up plenty of hits to the small business sector. After a tough summer of drought and bushfires, the businesses face what could be their toughest test yet.

Research by online lender OnDeck Australia shows 86% of small businesses have been impacted by COVID-19, with one in two severely affected. Many owners may assume they're covered by insurance. The reality, though, could be different.

Insurance simply won't come to the rescue of many businesses. Part of the problem is that among Australia's 800,000-plus small businesses, one in four have no business insurance at all.

This is a particular concern because a survey by insurer QBE found 87% of owners agree that a liability claim could put them out of business. If faced with a claim, most would likely run up huge personal debts to pay the bill.

Among businesses that do have business insurance, the issue of whether they are covered for losses brought about by the coronavirus can be confusing. Unfortunately, many are not directly protected against a pandemic.

Business interruption

Most business interruption (BI) policies cover disruption resulting from physical damage to the assets the business relies on to keep ticking over. This type of cover proved a lifeline for many businesses after last summer's bushfires.

However, as a rule infectious diseases are excluded from BI policies. That stems from research in 2005 that showed the insurance industry faced the potential for massive losses in the event of a pandemic.

The Business Council of Australia notes that a small number of businesses may have specialist cover that has been specifically written for that enterprise and is likely to be expensive. This sort of cover can protect it against disruptions to critical supplies from overseas or a sudden drop-off in trade due to specific border closures. But it is unlikely that the average small business would have this type of
bespoke insurance.

The bottom line is that if your business has BI cover, it is unlikely to offer a payout from losses caused by COVID-19. Even so, it is worth a call to your insurer or insurance broker to know where you stand.

Keep the policy going

As small businesses scramble to preserve their cash flow, insurance can seem like a non-essential expense, especially if the enterprise is "in hibernation" until the worst of the crisis is over.

However, there are good reasons to hold onto your policy.

"Insurance still provides valuable protection against other business-related risks, and having cover in place can ensure the long-term survival of the business," says Michael Gottlieb, managing director of Bizcover.

As a guide, even if your business has temporarily shut its doors, if the coverage has been taken out, insurance will still protect the value of stock and contents in the event of a break-in or fire.

It is important to keep your insurer up to date with any change in business activities. A personal trainer, for instance, may switch over to disability care services.

Under these circumstances, Gottlieb says it's critical to notify your insurer about what you are doing, as your policy may not cover you for new or significantly varied activities.

Premiums could rise

While a range of insurances are still relevant to small businesses, taking out cover now can mean paying higher premiums. This especially applies to trade credit insurance.

It's an area where accounting firm KPMG says insurers could see claims spiral if increasing numbers of companies go out of business. In the meantime, be sure to stay on top of workers' compensation premiums.

As KPMG notes, we could see a spike in workers claiming they weren't adequately protected by their employer against exposure to COVID-19 in the course of their normal working duties.

Even if that's not a risk, employers can still be responsible if an employee injures themselves while working from a home office.

Other types of cover

It can be disappointing to learn that your business cover offers no direct protection against the impact of Covid-19. Nonetheless, Bizcover's Michael Gottlieb says there are other associated risks that business owners can insure against.

Cyber attacks

As more employees work from home, Gottlieb says it makes sense to be sure your business has proper cyber security measures in place. "An interruption to your network can have a devastating impact."

In fact, insurance giant CGU says cyber attack is one of the leading risks for Australia's small-to-medium businesses, and companies that employ between one and 250 staff are most at risk. The average cost of a cyber incident in Australia is in excess of $250,000, so if your team is working remotely cyber insurance is worth a look.

Management liability

This insurance offers protection to business owners for the way they run the venture. And right now, with so much disruption going on, they can face a raft of risks around managing legislative changes and the need to reduce overheads.

Gottlieb says this sort of cover can be particularly useful if your business starts to make staff redundant further down the track, which can bring into question issues around unfair dismissal.

Trade credit cover

This protects the cash flow of a business by covering any losses that can arise if a debtor defaults or becomes insolvent. Not only is this type of cover highly relevant in the present environment, it can also be useful when operating conditions return to normal.

The security provided by trade credit insurance may be taken into account by a lender if you apply for commercial finance further down the track.

Key person cover

As the spread of the coronavirus continues, we've seen high-profile personalities from Tom Hanks to Boris Johnson catch the bug. It goes to show that no one is immune. If a key equity owner or employee falls ill and is unable to work again or, heaven forbid, dies, the impact on the business can be devastating. A payout from key person cover will never compensate for loss of life, but it can be a financial lifeline for a small business struggling to rebuild.

Gottlieb says there is also a safety net option for a percentage of your income in the form of personal accident and illness insurance, which can cover your income if you get an official diagnosis and are laid up on bed rest and unable to work.

Tax audit insurance

You can cover the costs of accountants and other professional fees incurred in the course of a taxation audit. As Gottlieb points out, stimulus package funds such as JobKeeper payments to subsidise employee wages are being funnelled through the tax office. This raises the possibility that the ATO will take an even closer look at the tax returns of small businesses applying for support payments.

"Being audited can be time consuming and complicated and can potentially result in a significant financial detriment," cautions Gottlieb. "You will almost certainly want the services of an external accountant or similar professional and their fees can be substantial."

This can make tax audit cover something to consider for your business.

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