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30 Jun 2016

The roof, the roof, the roof is on fire: What happens when a business under VA burns down?

READ TIME

3 min

Sure, costs can be cut...but perhaps not the insurance!


No business owner wants, or expects to see their premises engulfed in flames and surrounded by fire engines on breakfast television. At Worrells we're no different, and yet last month we woke to the news that a bowls club we were trading in Southern Brisbane with a strong turnaround prospect caught fire.

Insurance cover and other such precautions are often reduced when individuals or businesses are stressed financially. A gamble is taken against the odds of an incident actually occurring. However, this can be the very time when the foundations (be it business assets or the family home) must be protected the most if there is any chance to turnaround or move on with some sort of platform to rebuild.

Assets in insolvency appointments are often at risk from the outset due to the nature and circumstances. Accordingly, many insurers will not provide or continue to cover assets in insolvency administrations, and for those that do the insurance premiums are often reflective of the risk—high amounts for short periods.  We are often queried (mostly by bankrupts, but also by directors/stakeholders) about why we have incurred additional insurance expenses when the existing policy has adequate coverage—i.e. is cheaper and more critically, already paid.  We have no desire to spend creditors' money on duplicating costs or enriching insurer's shareholders; rather we take out our own insurance when the existing insurance policy no longer provides any or adequate coverage.

Another common feature of insolvency appointments is to have some assets, but a lack of funds at the commencement for the initial costs of preserving and realising those assets. Regularly insolvency practitioners are required to reach into our own pockets to fund such expenses, including insurance premiums and mandatory compliance reports.

Critically, in an insolvency administration whereby assets are being used to trade (e.g. poker machines) a decision must be made as to whether to insure for the equipment's replacement or auction value. This can mean a significant difference in cover value (e.g. hundreds of thousands of dollars), but often a relatively small difference in premium (e.g. a couple of hundred of dollars). In this case, we insured the bowls club for replacement value.

Every quarter I cringed at the bowls club's insurance premiums for physical asset protection, public liability, and business interruption coverage. However, it was never a consideration not to have such comprehensive insurance (albeit we are required by law and our industry code to do so), and in the case of this fire our claim is approximately $2.5 million to replace lost equipment, the fit out, and lost business.  Hopefully this will allow the club and Worrells to continue our financial turnaround endeavours.

Without these insurance policies, creditors, employees and the community would have lost out, and a longstanding community sporting and social club's doors close.

This is the first time in almost 15 years of insolvency practice that I've made an insurance claim during any appointment, and it is the largest in the Brisbane office's 43-year history. Certainly we will continue to operate with Murphy's Law high in mind... anything that can go wrong, will go wrong!  Having adequate insurance absolutely helps when it does.

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