GUIDE TO BUSINESS INSURANCE
Whether you have stumbled into the land of being self-employed (forced into it through work circumstances such as Contracting), or you have made the bold decision to take control of your work life, running your own business is a scary and exciting time in your life. It comes with responsibilities you just don't have as an employee. The only person that can pay you for your work is you. No work equals no income... equally, all the work you do, YOU get paid, not your old corporate employer......BUT......there is no sick leave... no holiday pay... you are responsible for all the expenses... and you work your butt off to make it a success.
So why do I need to consider the risks? Because every business is run by a human being, and human beings, whether they are employed or self-employed still have the same risk factors when it comes to Sickness, Injury, Death etc… there is no difference when it comes to those risks… where the risks lie however are in the financial impacts upon those events.
As an employee, you get paid to turn up to work, and equally, you get paid sick leave for short term illnesses… If you are away as an employee, it is up to the boss to find cover for you, to make sure the work you normally do is covered. If you are a Key Employee, hopefully they have strategies in place to cover the loss to the business if you are not there (although as part of Business Risk Evaluation, you will probably deal with Employees as well)… But what happens when you are the business, the rainmaker, the key revenue driver, the payroll, the ideas man or woman?
Who will keep your business going when you can not work? Who is going to pay your non income producing support staff? Who is going to pay your Creditors? Are those Personal Guarantees you signed at the bank going to be called up? As a business owner, or key person YOU are responsible for all of financial profits (and losses) of a business. Revenue keeps the business world flowing, but if it stops, the expenses don’t… enter the creditors…
Business Insurance Advice is all about understanding a business, who owns what, what’s at risk, who generates what, and what the “what” is!
An Adviser can help you evaluate the by risks by taking time to understand what makes a business tick… then, as an Adviser, you can add real value to protecting the business.
Some key areas that need to be considered are:
Key People in the business and the impact on the business if you lose someone
What debts the Business has, and what secures that debt
Who owns the business? And who would step in as a new owner if something went wrong?
What are the personal needs of the Directors/Shareholders of the business? Will the loss felt through the loss of a key person negatively affect the Shareholders personal incomes?
What responsibilities do the Directors and Shareholders of the business have to external and internal creditors?
KEY PERSON AND REVENUE PROTECTION
All businesses should consider the use of insurance to compensate the business for any financial loss or cost suffered because an insured event has occurred with respect to a key person.
Most businesses take out insurance cover for assets that do not make them profits – their plant, equipment, vehicles and buildings. But it is the human asset that, through initiative, drive, skill, specialist knowledge and ingenuity that can turn the capital and assets into a profit.
A ‘Key Person’ is someone whose continued association with a business provides that business with a significant and direct economic gain. Economic gain means more than just profits. It can, amongst other things, also include cost savings, capital injections, good will, access to credit and access to customers. A common example of a key person is an employee who is directly responsible for bringing in sales or who holds the key technical expertise on which a business relies.
Will the business be able to trade on? Or… Will it have to wind up?
When looking at Business we need to break it down into two clear categories. Those with Personal Guarantees (Contingent Liabilities) and those Debts without (quite often Shareholder Current Accounts or small Debenture Debt).
In New Zealand, most debt has a Personal Guarantee attached, so therefore it falls under Contingent Liabilities.
Personal guarantees are usually given by principals in relation to business liabilities, e.g. debentures, leases, trading finance, term loans, mortgages and O/D facilities etc.
Most personal guarantees give the guarantee holder unlimited security over a signatory's business and personal assets. This security takes priority over a family's rights to a deceased signatory's estate, which can leave the family of a deceased principal/director with nothing!
There is the added risk with personal guarantees that the guarantee holder has the right to call up the guarantee of any of the signatories for the full amount of the guarantee, regardless of that person’s percentage of shareholding.
OTHER BUSINESS DEBT
Most significant debts associated with a Business are usually covered by Personal Guarantees, however the Business may also have Debt that does not have a Personal Guarantee attached (for instance some Leases, Debentures and Shareholder Current Accounts).
The absence of shareholder agreements in New Zealand companies is a stumbling block that often results in costly disputes over how private companies are valued, run, grown or even wound-up.
From an Insurance point of view it is important to understand how the company is structured, what agreements are in place, and what are the intentions of its directors under certain circumstances. It is a common mistake for Advisers to put in place “Ownership Protection” in the form of Risk Cover, however, the policy is worth nothing if there is no formal agreement in place that stipulates what the funds are for… Insurance and an appropriate Agreement work hand in hand.
The main aim of this Risk Area is to ensure the smooth transfer of ownership, or winding-up of the business in the event of a shareholder leaving the business upon death, permanent disability or diagnosis of a critical illness or major trauma.
Not all businesses will need Key Person, Debt and Shareholder Cover... but ALL Businesses need to look at the financial impact to a business if something happened to the rainmaker.
Business Risk Cover is all about providing the Right Amount, into the Right Hands, at the Right Time from the Right Source... Giving you Cash-flow, Control and Certainty.
If you want to know more about Business Risk give Sun Insurance a call on:
09 360 5555 or 0273 000666; or,
e mail us: firstname.lastname@example.org www.suninsurance.nz