Acceptance of Risk

by John Barley

ACCEPTANCE OF RISK

Editorial by John Barley, Barley Insurances Ltd

Business risk is a part of everyday life. We accept risk from the moment we wake up in the morning to the time that we go to sleep. It is there 24 hours a day, 364 days of the year, to the time that the business closes or we die. Some of us accept risk more readily than others, some believing that they can control it, others recognising the risk and wishing to reduce the impact upon their pocket. Some just ignore it.

One of the aspects of business, however, is that we all have contractual obligations to fulfil. In franchising, the risk of owning and running a business is shared between the franchisor and the franchisee, and there are naturally obligations for the franchisee to fulfil. There are a number of clauses within the franchise agreement which discuss indemnifying the franchisor. The franchisor stipulates the covers that must be taken out by the franchisee and the franchisee has obligations to ensure the continuity of royalty payments to the franchisor.

Because of these obligations under the franchise agreement there is the necessity for the franchisee to ensure that his insurance package will respond to these obligations as well as cover the interests of other creditors, banks, trusts, tax department, staff and most important - his/herself. The franchisee invests most of his savings, borrows money, provides his time and his family's support.

It is natural to want to get the best possible deal in monitory terms but in view of the risks to which a business owner is exposed it is not good business sense to wish to buy insurance at the cheapest possible price, to the exclusion of the quality of the cover provided. There is always the argument by many of my clients/prospective customers that they want to match eggs with eggs, yet at the end of the day all they are doing is comparing prices because they do not understand the differences between the various policies and the extensions which can be purchased - extensions which can reduce the risk that they have taken in buying the business.

At Barley Insurances Ltd we have adopted the Celtic knot and reproduced this below as we believe it is a very good representation of how all the insurances inter-relate to provide a comprehensive package. Take one piece out of that package; take one piece out of the knot; and the total unravels.

Every business is principally facing the same risk. The only difference being the sums insured and the type of business that you are in. It is nonetheless vitally important that your broker understand your business and the various factors that impact on the business. If s/he does not know your business then he cannot provide the correct advice or the appropriate level of cover that you will require. There is only one thing worse than having to tell a client that the loss is not covered because they did not purchase the cover - that is the feeling the owner is experiencing when he realises that this loss will come off his bottom line, which could mean that the business can no longer operate, becomes temporarily insolvent and yet there are still bills to be paid for GST, salaries, rent, wages, while continuing to pay mortgages etc.

What may appear as a $10,000 loss may in effect turn out to be a financial disaster at the end of the day.

When we talk to franchisees or franchisors we find out about their business, we talk about their business environment, their market, their product and the issues that relate to the running of their business on a day to day basis. Once we have this information we then look at the products that can be provided to cover the various risks which relate to the business. These covers are Material Damage, Business Interruption, Legal Liability, Statutory Liabilities, Motor Vehicle, Computer Breakdown, Trade Credit Insurance and Directors & Officers Liability, Marine Cargo, Marine Transit, Life Insurances, Key Man Cover, Risk Management and a new composite Life/Risk Management/Succession Planning product provided exclusively by Barley Insurances, Acropolis^TM.

The cover which I believe requires the most attention in today's market is Business Interruption. If this policy is not constructed correctly it could mean the financial insolvency of your business. In conjunction with the Business Interruption cover there needs to be a risk management exercise carried out along with development of a Disaster Recovery Plan and Business Continuity Programme. If these last two items are not in place then the Business Interruption Policy willnot function as well as it might be.

The Material Damage policy which covers plant, equipment, tools, mobile phones, laptops, etc is also a policy which is often handled with blatant apathy and can also be customised for the business. The Material Damage policy can be extended to include cover for theft, transit, laptops anywhere in New Zealand, stock anywhere in New Zealand, tools and equipment, etc. However, the policy can only be designed for your business once the broker understands your business.

Business Interruption, as mentioned before is a cover which is designed to protect the business against loss of income due to a disaster. If it is not constructed correctly with the appropriate extensions then the policy could be considered a waste of money. It is most important that the buyer recognises that the Business Interruption policy is one of the most critical covers in the portfolio and it should not be ignored for the sake of cost. If the Business Interruption policy is not constructed correctly it could cost a great deal more than the savings in premium. It could cost you your business.

The Liability Package includes the Legal Liability and Statutory Liabilities covers. The Legal Liability is commonly known as Public Liability Insurance and once again this needs to be tailored to your business. If you are completing work on people's homes then there may be the necessity to have a Contract Works cover with a Legal Liability extension. If you are grooming motor vehicles there is the need to have Service & Repair extension on the policy. The price of a Legal Liability policy can differ depending upon the level of cover purchased. A basic cover without any extensions could cost as little as $250 - but in the event of a claim you may find that it does not respond.

Statutory Liability insurance is a cover which we recommend to all of our clients as it is an integral part of operating any business in New Zealand. Specific focus is upon the Health & Safety in Employment Act and Consumer Guarantee Act. Once again the cover that is being offered under these particular products is very important and you need to understand the differences in the covers being provided. Some policies only cover the fines, whilst others cover the fines, damages and defense costs. There is also a difference between Legal Liability, Statutory Liabilities and Professional Indemnity Insurance. If you are providing advice to your customers and your customers follow that advice, subsequently incurring a financial loss, this is not Public Liability it is Professional Liability. The difference is that Public Liability is when there is damage to third party property. Professional Indemnity is when there is financial loss to a third party.

One of the covers that is often overlooked is the Directors & Officers Liability. Many accountants and small business owners do not believe there is an exposure for them under the Companies Act 1993. I constantly point out to my clients that the exposure for a small business owner is as great as a corporate. Specific attention should be made to the fact that if the business is trading in an insolvent manner then the director or officer of that business can be personally held liable and the costs of defense and payment to creditors is upon the business owner/officer of the company and this of course threatens not only the assets of the business but also the business owner's personal assets.

Another issue which we have often made our clients aware of is the cost involved in IRD tax investigations. Failure to ensure GST and PAYE payments are made, and that calculations are 100% correct is opening the business owner up to fines and penalties and investigation costs by the IRD. Be aware that even if you use the services of an accountant for these functions, the accountant is not liable - your business is. On this point it is also important that the franchisee recognises that under your franchise agreement should the franchisor incur costs due to the franchisee's business failure then the franchisee must indemnify the franchisor for those costs. Thus, there is the need for Directors & Officers Liability Insurance.

Risk management not only covers the physical assets of the business but also its vital human resources. Barley Insurances Ltd have exclusive availability of a new product called AcropolisTM which provides assistance in this area. AcropolisTM involves risk management on life issues within a business. The concept is innovative and the costs are very attractive. Succession planning is an important part of risk management and disaster recovery.

With risk aversion people buy insurance, but by buying insurance for the least possible cost without regard for the cover itself, they are merely paying lip service to the issue. Please also note that simply having a family trust will not prevent you from having your assets and your savings taken from you. There are a number of issues revolving around the security of family trusts, with one of them being that a trustee is responsible for protecting the assets of the trust. Thus failure to fulfil this obligation means that the trustee is liable and can be sued by the beneficiaries for the loss of that asset - and, yes, you can buy cover for Trustee's Liability.

When purchasing insurances, in order to ensure that you are covering your risks as well as possible, you need to:

Identify the risks impacting upon your business and match with the required insurance policies, ensuring that all necessary extensions are purchased.

Develop a risk management plan encompassing the basics - risk management, disaster recover and business continuity.

When using a broker ensure that s/he spends time getting to know your business so that all possible risks are identified.

Barley Insurances Ltd, PO Box 1412, Shortland Street, Auckland

Phone (09) 827-7266, Fax (09) 827-7269, www.barley.co.nz