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Insurance during a recession



During a recession, it is understandable to question whether insurance should be cut back on, as people look to trim overheads in anticipation of difficult economic times in the future. However, businesses need to weigh up the effect of any reduction in insurance cover, not just the potential cost saving


The value of insurance is that you pay a predictable, regular amount (the premium) for protection from a large, unexpected, unbudgeted cost that would severely affect your financial situation if it happened.


In tough times, a big, costly, unforeseen event can be much harder to recover from, because you may not have the same level of savings or ability to borrow as you would when business is going strong. This makes having insurance during a slowdown even more important. Rather than seeing it as a cost to be cut back, insurance premiums can be viewed as an investment to protect yourself from an even bigger, unexpected cost.


The real question that should be asked is: “What risks am I prepared to take on myself rather than being insured for?”

Below are some considerations that should be given thought as you review your investment in insurance.


Public liability insurance

This policy protects you if you make a mistake (or someone else you’re responsible for does) that causes damage to a third party’s property and they hold you responsible.


Mistakes can happen at any time and, by their nature, are unexpected, so you can’t plan for them. The worst ones can be very costly, so unless you have put aside a considerable amount of money to cover this possibility, insurance is a good investment.


Often, if you’re working for commercial clients or have a maintenance contract, these will require you to maintain a certain level of cover, so you must keep this in place. Even when doing smaller residential jobs, there is always the risk of accidental damage occurring.


Savings can be made at renewal time, if you anticipate your turnover (gross income) being lower, as premiums are based on turnover. Bear in mind, there are minimum premiums. Also, different insurers calculate premiums at different levels, so a small change in turnover may not affect your premium if you still sit within the same band.


Employee disputes liability

If you think you may have to make changes to your employment relationships, cut hours, or lay off staff in the coming months, it may be worth taking out employee disputes liability cover. This protects you from claims of unfair dismissal, discrimination, harassment and other situations where a disgruntled ex-employee may take a case to the Employment Relations Authority.

Note: some insurers are beginning to exclude cover for redundancy related claims, or are asking for more information on your business before offering this cover.


Directors & officers liability


This policy protects the directors of a company personally against claims of mismanagement, which can include claims by creditors if the company becomes insolvent.


The Companies Act allows the personal assets of directors to be targeted if they have been found to have breached their statutory duties under the Act – in particular, to not allow the business to continue to trade while insolvent. If this happens, a liquidator, on behalf of creditors or customers, can go after the personal assets of directors to recover losses.


The good news is that the Government is amending the Companies Act to temporarily protect directors from personal liability that they would otherwise have under section 135 and 136 of the Companies Act. This protection will last for a period of six months, effective from 3 April 2020.


It is designed to assist directors who are managing companies facing significant liquidity issues, by limiting their risk and easing their concerns in doing so. This is intended to encourage directors to continue to trade and incur obligations, as opposed to prematurely winding up the company due to the risk of personal liability.


Insolvency cover under a D&O policy is only available to companies with a healthy financial position, but with the Government’s temporary protections expiring in October and the future uncertain, it could be a prudent investment.


Statutory liability


This covers your liability for fines and penalties under law. One of the main benefits is that it covers the legal costs and reparations awarded for prosecutions under the Health and Safety at Work Act (although it cannot legally insure WorkSafe fines).


It’s not clear yet how WorkSafe will approach breaches of the tough new guidelines for managing Covid-19 exposure on site. A potential worst-case scenario could see a worker come into contact with the disease while on site then pass it on to someone else – perhaps an older person or one with respiratory issues – who dies.

Could this trigger a WorkSafe investigation? If a breach of good practice guidelines was found, could this lead to a prosecution?


Vehicles


These are a valuable asset for most people. An accident that is your fault can also expose you to the cost of repairing other vehicles or property involved.


One way to optimise your premium is to ensure your business vehicles are insured for their current market value, not how much they were worth three years ago.


It is also important that the amount insured for commercial vehicles is excluding GST (the insurer will add this on in the event of a claim). Another option is to reduce cover from full/comprehensive to third party, fire and theft, or even third party only. However, you will then be responsible for cost of damage (or theft or fire) to your own vehicles. Another worthwhile consideration is to make sure your trailers are included under your vehicle policy.


Tools and equipment

Tool theft is pretty common – even at the best of times. In a struggling economy, not only is theft more likely, it could also be harder to afford replacing stolen items, which may lead to having to purchase cheaper replacements. It is also costly to be off a job because you do not have the required tools.

If you can’t afford to insure your tools, think very carefully about what security measures you have in place to reduce the chances of them being pinched. Are they stored in the tray of your ute, or in a trailer parked on the street? Is your garage alarmed? Are they GPS tagged or engraved?


Life, health, mortgage & income protection


The value of these policies does not change in a recession. In fact, the benefits are in many ways greater.


Alternative employment may be difficult to find if you get sick, have to be off the tools, and the financial burden on your family if you died could be even harder to bear. If your policy includes cover in the event of redundancy, you would be wise to hang on to this for as long as possible!


Look at the level of income you’re insuring, can these be adjusted? What about extending stand down periods?


Payment options


Many insurers and brokers (through premium funding services) offer monthly payment plans that allow you to spread the cost throughout the year. They typically come with fees and interest, but the cashflow benefit of not having to pay all at once can outweigh the extra cost.


In a nutshell


Insurance may seem like a cost that can be cut, but make sure you think through the implications of doing so.


There are alternatives to cancelling policies, such as adjusting cover amounts, revising turnover estimates, and switching to a monthly payment plan.


However, before you do anything, ask yourself the question we put forward at the beginning, “What amount of risk am I prepared to take on personally rather than being insured for?”



This article is not exhaustive and you should conduct your own assessment of your specific needs, perhaps along with an insurance/risk management professional adviser. There are other policies to cover different risks. Individual policy wordings from different insurers may vary. You should refer to the specific exclusions in your own policy wordings and discuss them with your insurance adviser if you are unsure.




Builtin are New Zealand’s Trade Insurance Experts. For more information visit builtininsurance.co.nz, email Ben Rickard at ben@builtin.co.nz or call him on 0800 BUILTIN.

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