It has been a few months since the Queensland Floods and Cyclones and we are getting the inevitable inquiries from business owners who just cannot reopen or build their businesses back to levels sufficient enough to stay or once again become solvent.
Much has been written about insurance and whether homes are covered for the type of flood that people suffered. Those issues are not part of this article. Though many people are doing it tough because of these issues, no more so than one of my friends who find themselves with an uninsured house they cannot afford to repair, a wrecked uninsured business and no way to pay the mortgage or the car loans this month or next month … It is possible that they will be visiting one of my competitors in the next few months.
These problems got us to thinking about insurance and business in general and the insolvencies that we have dealt with that have been caused by a lack of insurance, but that may have been avoided with proper insurance in place.
Not that it is a business example but it illustrates the point. The son of another friend had a car accident (his fault) and because he did not have the cheapest third party property insurance available, has to pay for the damage he caused to the other (nice shiny new expensive) car he ran into. He was lucky enough to have dad come to the rescue, and unlucky enough to have to do hard labor around the house to pay it back. He learned the lesson and now has full insurance.
But businesses can find themselves in the same position. Most businesses will have the very basic insurance that should cover the obvious – I use the word should given the arguments over flood insurance currently underway. But what about other more obscure issues leading to financial losses? Are these insured?
What if someone broke in and stole goods? Is the value of the goods covered? Is the damage done during the break in covered? In most cases businesses will have these situations insured as they are some of the most obvious.
But what if the theft was from an employee committing fraud? One current high profile insolvency was at least partially caused because of a massive employee fraud that does not appear to have been insured. What if the item stolen by the employee was intellectual property? You may have rights against the employee, but what about the losses suffered from the theft?
We have had many instances over the years where the lack of cash flow from simple an uninsured theft has lead to the insolvency of the business – from stealing stock, debtor’s monies and redirecting tax payments. We have mentioned some of these in past articles. The cash disappears, the police investigate, the employee cannot pay it back and the cash hole never gets filled. After struggling on for a period during the investigation while the business owners have their eyes ‘off the ball’, we end up getting a call.
We have also had instances where businesses have been ruined by the death or incapacity of the main person in the business. These are usually smaller family run businesses reliant upon the skills or connections of one person, but many larger businesses also revolve around one important character. What would happen if that person suddenly was removed from the scene?
Most people (business owners) have life insurance and disability insurance and personally have income protection insurance, but that money should be for the family to survive or care for the person if something happens. It should not have to be used to support or potentially lost because of a business failure caused by the same event.
Added to that equation, usually there are many more people affected by the insolvency and failure of a small business than just the business owners – the employees and their families, small suppliers that may not be paid, and possibly customers that are left in the lurch because they were relying on the business’s performance on a contract of work or supply. All of these may be affected because a business failed because of a lack of insurance cover.
It is difficult to come to a definite point in the article. The message that we are trying to give is that unforeseen events happen and sometimes in obscure areas, and some that we would never even contemplate happening. From a business perspective, these are risks that must be considered and, where possible, insured against.