A basic understanding of how insurance works for small businesses is fundamental to the proper management of your business. As a small business owner, you not only have to take mandatory insurance as required by the South African law, but also have a good range of optional insurance products to choose from. But to choose a good insurance product for your small business, you first have to understand. In this guide, you will learn about small business insurance, and find out:
- Why your business needs insurance,
- What the important segments of insurance contracts are, and
- What surrounds an insurance claim.
Why Insurance, its Benefits
- An insurance will shield your business against financial setback from damages to equipment, property or vehicles; injury to employees or the public while a business operation is ongoing; or tragedy and loss of life.
- Insurance will also free you from worry and give you the freedom to focus on the management of the business.
- Without insurance you cannot add customers and new employees, get into partnerships, venture into new markets or create new products. Insurance is a requirement for almost all business dealings.
- Insurance ensures that the continuity of the business is maintained. It is very hard to regain lost ground in the event that your market share reduces dramatically because customers do not like to be associated with failed brands.
- Insurance shields your business from opportunists who make a living out of manipulating businesses into paying them for damages.
- Insurance is outsourced risk management. Once employed, they make sure you are doing everything right to avoid falling into financial pitfalls. Nevertheless, if you end up in one, they will handle it themselves. A burden which is hard for a small business with little knowledge in legal matters.
Simple Understanding of the Insurance Contract
The insurance contract formalizes the mutual understanding a business has with an insurance company (or insurer). The two parties are bound by the contract which gives each of them an obligation to the other. It is a symbol of the work your insurance company will do for you. There are in essence, three elements that will help you understand the contract:
The Obligation of Your Business Under the Contract
- Your business is supposed to provide the insurer with accurate and honest information. Insurance companies use the information you send about the company to evaluate the risk (what you want insured against) and assign your business an “insurance risk profile” (technical terms are in quotes throughout the article). You initiate this by filling out the selected insurer’s proposal form. Which you send them as an “offer.” The insurer’s reply is an “acceptance.” It means they agree to insure your business on the terms you specified in the offer. Although that is not always the case. Sometimes they make changes to your proposed terms before they accept.
- Your business is also obliged by law to provide any and all information that might influence the insurance company’s decisions about the terms of the contract. This is called “duty of disclosure.” It includes your history with any other insurance company. Especially if your offer to get insured has been declined before.
- Your business must pay premiums. The premium is the agreed amount that the insurance company charges your business for an “insurance cover.” An insurance cover is the amount that is paid out to your business for the risk insured, should the risk become an actual problem. Risks include damages and injuries to business property and personnel. The cover is based on the amount of money that your business stands to lose in the event that the damages or injuries occur. Insurers determine the premium by using the information you provide in the first stages of offer and acceptance. The information, after evaluation, is what gives your risk profile. Sometimes they are grouped to form a “risk class.” These are sophisticated algorithms which should not worry you. It is just important to note why they need your business’ information. You should expect to pay premiums monthly. This will aggregate to the total premium for the whole “insurance policy term”. If your business does not pay the premium within the stipulated time, the insurer might be forced to cancel your policy. Often, there is a grace period during which the insurer expects you to pay the expected premium.
- Your business is supposed to pay a “deductible” if one is agreed upon with the insurer. In cases where there is a deductible, the business pays a specified amount whenever there is a claim. You pay the other. What you pay is the deductible. Note however, that in this kind of understanding, the insurer will only pay a claim after you pay the deductible.
The obligations of the insurer
- In case there is a claim, the insurer is supposed to validate it and make payments to your business.
- Your insurer can partner with other insurance companies to share the cost of the “maximum” on your insurance policy. Maximum is a term used representing the highest amount the insurer will pay to settle your claim under a given policy.
- The insurer must divulge all the details of the insurance cover they are selling.
The Values of the Contract
The contract binds the two parties in an understanding that is both mutually beneficial and protective. It has values to help serve it’s legal and symbolic purposes. These values include:
- The legal requirement that the person signing the contract should be mentally upright. A minor or someone who is mentally ill cannot enter into an agreement with the insurer.
- A stipulation that is your lawful right to get insurance cover for anything that may cause you financial harm.
- An “excess” that is set by the insurer to prevent trivial claims. An excess is a minimum cash value of the damages for a claim that would necessitate a pay out. If your claim is below the excess, it will not get a pay out.
- The lower the deductible, the higher the premium and vice versa.
- The higher the “policy limit,” the higher the premiums. Policy limit is the maximum amount the insurer agrees to cover that is usually the pay out on the claim. It is in essence, the maximum.
- The principle of subrogation allows the insurer to lawfully pursue a third party for reimbursement of the amount used to pay out a claim the insurer believes was brought about by damages or injury that the third party is responsible for.
- If the insurer does not ask about information which you did not fill in on the proposal form, they cannot reject a claim based on that particular omission. It is declared a waiver by the “principle of waiver and estoppel,” which is a part of the contract.
Please note that before you sign a contract with the insurance company (also called insurer) of your choosing, you should make sure you understand the terms of the contract. If you don’t, consult an insurance advisor.
Important Insurance Policies for Small Businesses
Ideally, you want to get the best possible (or comprehensive) insurance cover for your business. However, there are several constraints that will make your search challenging and several factors that will complicate it. There is no simple answer for all your business’ insurance needs. The list in this segment is not exhaustive or even specific to your business’ needs, but it will give you a clue about what to look for and where you will search. Moreover, for the most specific answer to your business’ insurance needs, get a one on one consultation with an insurance expert (an insurance advisor or an insurance broker).
Liability means that the business is responsible for the damages, injury or even death to a third party who is not a signatory to the contract. The third party can either be an individual, another business or an insurance company pursuing a subrogation.
Liability insurance covers are the broadest category of insurance covers because there are many potential risks from third parties to your business. Liability insurance is important because all businesses are vulnerable to lawsuits from third parties. These liabilities include:
Product Liability Insurance – In case your business is an eatery. The main product is food which your customers can easily claim to be the cause of one or another health problem. You should make sure you have product liability insurance if your business sells products on the general market. It protects your business from injury or death caused by your product. Sometimes even fraudsters take advantage of this risk to get pay out from businesses. You shouldn’t let these opportunists catch you off guard.
Employer’s Liability and Workers Compensation – Workers compensation is one of the mandatory insurance covers in the republic. You must take out this insurance for yourself and your employees. It covers medical bills, unemployment stimulus and compensation for pain due to injury sustained on the job.
Commercial Liability Insurance – This is an insurance cover for three potential risks that result from negligence by your employees. First, the risk of intellectual property theft, libel or slander. Second, any lawsuits opened against your business for property damage or injury. Lastly lawsuits for injury to the general public or other employees.
Business Property/Asset Insurance
The second type of insurance is the Business property or business asset insurance. Small Businesses can insure property against damages resulting from tangible and intangible threats with this cover. This insurance allows for cyber security insurance which shields against sudden hardware or software damage.
Business Interruption Insurance
This next insurance gives either the business or it’s owners insurance against a sudden stop in the profits from the business. It may be due to damages of business infrastructure or any other sudden unexpected occurrence. Although, this kind of insurance can still be liability insurance depending on the terms of the agreement you make with your insurer for it.
Business Auto Insurance
This is insurance for vehicles registered to the business that cover the vehicle against damage or theft. Auto insurance covers also allow inclusion of medical covers for the driver and passengers of the damaged vehicle in a car accident. Damages to motor vehicles can also be by fire.
The Road Accident Fund (RAF)
The Road Accident Fund (RAF) is a compulsory insurance that the government levies automatically on petrol bought by motorists. It covers drivers against road accidents caused due to negligence. It pays medical expenses and loss of income and also compensates the affected persons.
Unemployment Insurance Fund (UIF)
This insurance is compulsory for employers and employees. Additionally, the state also makes contributions to it. The fund gives recently unemployed individuals a 26 week pay.
Compensation fund is a disease, disability and disability cover for employers and employees by the government of South Africa. As a business owner, you are required by the state to pay the assessment fees as a contribution to the fund.
Lastly, if you can, you should take life insurance for you and your employees as an incentive to keep everyone motivated. With a group term insurance policy for businesses, there is a chance you will get higher bank loans.
Employees prefer this type of insurance because it is convenient for them. They get it immediately when they get a job, they don’t have to undergo a medical exam and they never have to worry about the payments. You deduct life term insurance straight from their salaries before paying them.
Reasons Insurers Might Reject A Claim
There are conditions when an insurer might reject a claim. Some of these reasons include:
Breach of Representation – This happens when your business lies about the details of your business on crucial parts of the contract. If the insurance company finds this breach deliberate, then they will not pay your claim.
Breach of Warranty – Warranties are restrictions to changes that may cause an increase in significance. A breach of warranty is used by your insurer to deny claims that occurred when you didn’t adjust your insurance contract by informing them of the changes.
Breach of Utmost Good claim – This is a scenario in which you fail to give information to the insurer either consciously or accidentally. It is fraudulent non-disclosure when you hold off information from the insurance company with an intent to deceive. The insurer will then not pay your claim.
In case you fail to supply information unknowingly, it is an innocent non disclosure. They assess the breach further and if they find the business innocent but still having caused a breach that is significant to the contract, they may let you get off with just a little penalty. Which insurers normally do by taking additional premiums. In case the breach is insignificant to the contract, you can get off without denounced claims or additional premiums.
Damages not Exceeding the Excess – The insurer will not condone any claim of an amount below the excess.
The most important cover for your small business are the compulsory ones. The rest are easier to choose now that you know a little bit about them. Disregarding insurance completely is not good for your business.
According to Anton Ossip, the CEO at Discovery Insurance, “SMEs and start-ups face a lot of challenges relating to financial and operational issues. It is important for these businesses to have insurance that protects them against these risks that could lead to larger financial losses that the business may not recover from.”
Insurance for small businesses in South Africa is important for the success of a business. As a small business owner, you can consult your insurance broker for the best insurance for small businesses deals available for you. This guide will help you navigate the insurance for small businesses space.
Disclaimer: This article is for educational purposes only. It is not meant as a substitute for professional insurance advice from an insurance advisor or insurance broker. Consult an insurance advisor or insurance broker for any specifics on the best insurance for your business.