How to prepare your business for disaster
If a disaster wiped out your company tomorrow, would bad luck or bad planning be to blame?
It’s Sunday morning on December 11 2005 and the nation’s TVs are full of pictures of the mother of all blazes. The Buncefield oil depot in Hemel Hempstead has blown its lid and across the country, business owners are wondering how they are going to be affected.
Among them is Jon Kamaluddin, finance director of clothing company ASOS. His warehouse full of designer clothes is near the blazing depot. He doesn’t know it yet, but the blast has taken the roof off and the sprinkler system has soaked his stock.
He takes a phone call. It is his insurance broker who assures him that it isn’t quite the disaster it could’ve been and that he will begin talks with the insurer. The company is well covered and will recoup all losses. Five weeks later and ASOS is up and trading again with a total payment of £5.5m on the way. Today it is a booming listed company with predicted revenues for 2007 of £38m.
“We have always been pretty risk averse in terms of taking out insurance,” Kamaluddin explains. “We sit down with our broker quarterly and talk about forecasts for the year ahead. Loss adjusters came in just a couple of days after the blast and put the insurers on notice. Within two weeks of the incident they paid out £1.5m.”
This, in theory, is how insurance should work. It might start with a nightmare scenario, but what should follow is a prompt payout, then a speedy return to business as usual. “Insurance is the ultimate in trust for a business,” says Robert Bartlett, of small business specialist insurer Brighter Business. “You buy into the pledge that in the most trying of circumstances they’ll help you out.” Sadly, this just isn’t the case for many businesses.
Entrepreneurs often see insurance as a necessary evil or dead money. Some make the mistake of scrimping on the costs and end up with inadequate cover. The results are sometimes disastrous – and the event doesn’t have to be nearly as spectacular as Buncefield.
Lessons in liability
As an employer you are liable should your staff suffer injury, sickness or death as a result of their work. By law you must have £5m of liability for staff but most policies offer £10m. And with close to 400 deaths and nearly 30,000 major injuries at work each year in the UK (not to mention rising damages claims), you would be well advised not to make any cuts here.
Directors’ liability covers your legal costs in these areas and also those of your health and safety officers. Public liability insurance, though not compulsory, is something only the most cavalier business would cut back on and is a prerequisite for some contracts, particularly in the public sector. Ensure you know what the minimum requirement for your clients is.
Motor insurance is also compulsory, however it is an area liable to trip up the unwary if an employee is using his own vehicle – you must still ensure they are insured properly and should take copies of documents along with the licence and MOT details.
When it comes to insurance cover, incidents such as floods, fires, burglaries and physical damage are likely to spring to mind. All come under the heading of business interruption insurance.
This might appear straightforward, but many business owners underestimate the disruption caused by a major incident such as a fire. It is not merely the rebuilding, lost stock and equipment you will need cash for, but also the loss of business and possibly the time needed to re-recruit staff and to woo former customers who have gone elsewhere.
“With business continuity, you take out what you need to cover yourself for the worst-case scenario,” says Angus Tucker, director of insurance claims decisions at Grant Thornton. “You should be looking at two years’ worth of cover to get back on your feet, but many one-year policies are sold.”
The knock-on effects of interruption are hard to predict. Sometimes the trouble doesn’t hit you directly, but you are drawn into the disruption.
Tucker cites the July 7 bombings in London as an example, pointing out that while no businesses (aside from Transport for London) suffered significant property damage, many were behind police cordons and would have been prevented from trading while investigations were under way. ‘Denial of access’ by the police is one area you should look to incorporate as part of a deal, even if it is only for a burglary nexxt door rather than an al-Qaida strike.
Extensions to this insurance are critical and you need to know where the linchpins of your business are. Virtually all companies require power and water, so a utilities exxtension should be included. And if you are in products, a key supplier going bust could mean you would have to down tools. If so, this should be factored into the policy.
In some cases, particularly in sectors such as telecommunications or retail, an exxtension to cover an interruption in your customers’ business is also worth considering. Costs for policies such as business interruption can vary so widely that it is difficult to put a figure on them. No matter – the cost is less important than knowing you can survive a disaster.
Key man cover
Staff may come and go, but some personnel are integral. An insurance policy can be an employee benefit as well as providing a moral edge. Sara Render, chief executive officer of PR company Kinross Render, says she was glad she had key man insurance when her co-founder, Vyv Kinross, suffered a heart attack and decided to leave the business: “The money enabled us to keep him on full pay during what was a very difficult time for him and his family and also meant that I could get replacement help in and afford for the company to buy back his shares,” she says. “He was only in his 40s, so it wasn’t something that seemed like a huge priority until we needed it.”
The cost depends on the age and health of the staff member. Smokers are more expensive. In addition, staff on higher salaries are more expensive to cover and costs will vary depending on how long you want any payout to last. As a rough idea of the figures, Render says she pays just over £2,600 for £300,000 of cover for a 48-year-old smoker and less than £800 for £100,000 of cover for a non-smoker in their early 40s, whereas a late-30s non-smoker covered for £65,000 costs just over £260 a year.
Manufacturers shudder at the thought of a product recall or often believe it is not applicable to their field of business. However, the Consumer Protection Act 1987 makes it a criminal offence to supply any unsafe consumer goods, so if your processes go awry, you will have to halt operations, recall stock and fix the problem before you can get started again.
“There’s a lot of product recall going on in the background and it is a very expensive exercise, but if something has happened then there’s no other choice,” Tucker warns.
Nor do you have to be found negligent to get sued – theoretically anyone who makes, repairs or sells products could end up with a writ.
If you need this, there’s a reasonable chance you already have it. Essentially this protects against legal action taken by a client and is compulsory for some professional categories. However, the number of other companies that seek cover out of choice is growing. For example, some internet service providers cover in case they inadvertently transmit viruses.
Legal costs are very high and could finish uninsured firms, so you may consider peace of mind worth the price even ?ifyouneverneedthecover.if you never need the cover.
The difficult element of this insurance is predicting how much you will need and therefore how much you should spend on a policy. It is a notoriously grey area – the best counsel is to seek advice from a reputable, well-informed broker.
Trade credit insurance
This is a must-have if a significant amount of your business is tied up in one client, becauseitensuresbecause it ensures you are protected should they default or go under. Ask yourself the following question: if a big customer went bust tomorrow and defaulted on an outstanding payment, would you survive? If not, you need cover.
Should you use a broker?
According to a recent investigation by the European Commission, small businesses are not well served by brokerages. Brokers made more money from bigger clients with larger premiums and small businesses simply weren’t worth the effort, it found. In addition, a lot of small businesses are unwittingly paying their brokers high commissions, sometimes in the region of 30%. So should you go direct?
A new generation of insurers is selling policies directly tobusinesseseitherviathephoneorweb-to businesses either via the phone or websites (or a combination of the two). Companies such as Brighter Business, Premierline and More Than Business (part of Royal Sun Alliance) offer low-cost policies to businesses – prices start from around £250 for a package that includes public and employer liability plus some business interruption cover. The good news is that these insurers reckon that with reduced overheads leading to lower costs, this is the future of business insurance.
“Twenty years ago you bought car insurance through a broker, but you don’t do that now,” says Brighter Business’ Bartlett.
However, at the moment this new wave of insurance remains largely focused on the smaller end of the market and businesses like yours might out grow the provider. To some extent, the decision depends on how comfortable you are buying direct and not having an adviser go through the policies with you first.
“The insurer can only advise you within the parameters of their scheme,” argues Mike Langton, divisional managing director of brokers Jardine Lloyd Thompson.
Furthermore, if you are concerned that your broker is fleecing you then you can always ask them how much they are making.
“If asked, all brokers are required by law to tell you how much they are earning from the deal. It is a business right,” says Eric Galbraith, chief executive of the British Insurance Brokers Association.
But do entrepreneurs ask? “No, generally they don’t,” says James Stewart, business development manager of brokers Noyce Livett, “although I sometimes tell a client because I want them to know that we aren’t making as much as they think we are.”
Getting a good broker
Recommendation tends to be the method by which most businesses fi nd their broker. Kamaluddin found Stewart of Noyce Livett this way and he was on the other end of the phone on that fateful Sunday morning in December – a good tip off. Noyce Livett is kept on a retainer by ASOS. Such a deal is pricey but the broker becomes like another company department. Regular reviews of your needs are important when you are growing fast, so schedule them in twice a year at a minimum. Some of you will not be able to afford a retainer yet but it is worth fi nding a broker that has the longterm in mind.
Your broker must also be fully qualified and should have the all-important letters after his name such as ACII (associate of the Charter Insurance Institute) or even FCII (fellow). It is also wise to fi nd out if they already have experience of your sector and of businesses that have implemented similar expansion plans to yours – if you hope to export to China, don’t be afraid to ask if your broker has worked with clients who have done the same. Finally, if you are left up the proverbial creek without a paddle by a situation which you believe should be covered by your insurance policy, then your broker may be liable if they have not informed you appropriately. The relationship between the broker and the client needs to be open, and both parties should disclose all relevant facts relating to the deal. If not, trouble may well lie ahead.
When the assessors come in
Should you need to make a claim, your insurer will want to be certain it is valid. But what does ‘valid’ mean for those in the industry?
“The idea of insurance is that it is protecting against unforeseen events. If it is not unforeseen, then it probably doesn’t fall under into the realm of insurance,” explains Toby Langford, head of underwriting at More Than Business.
However, to say a break-in was unforeseen is not going to be enough if your burglar alarm didn’t sound or the offi ce doors and windows were not locked. If an assessor calls following a claim, they will ask for a lot of paperwork, which needs to be detailed and in order (see case study below). All obligations of the policy will be called into question. Insurers don’t make money by paying out and will only stump up if there’s absolutely no reason for them not to pay. You have been warned.
Case study: Making a claim
MD: Gayna Hart
Gayna Hart, founder of ?3.5m IT business Quicksilva, had a visit from her insurer following a break-in. Her burglar alarm didn?t sound when the thieves broke in and the insurer was in no mood to give up easily.
Hart had to produce detailed records to prove the alarm had been tested regularly and that a set procedure for securing the premises was followed every night. However, because the alarm had not sounded, Hart was caught between a security company and an insurer, neither of which wanted to pay. It took four months to secure the money and it only came after the insurer decided to pursue the security firm. Hart received ?30,000 to replace the laptops and other equipment which had been stolen.
?You assume you are covered but they will look for a loophole. Make sure you fulfil your obligations,? she warns.
However, Hart wasn?t as well covered as she thought. The burglary was a major disruption for an IT company that wrote computer codes and she presumed the business would be compensated for lost work because she was covered for ?work in progress?. She soon found out otherwise and was only compensated for the cost of the goods taken.