Insuring a growing business

Scaling up a business often involves taking on additional risks and exposures, which can be mitigated through the purchase of business insurance. Scale-up business insurance is designed to provide protection against a range of risks that are unique to fast-growing companies.

Here are some types of scale-up business insurance policies you might consider:

• General Liability Insurance: This type of policy provides coverage for damages and legal expenses arising from bodily injury or property damage claims made against your business.
• Professional Indemnity Insurance: Also known as Errors & Omissions insurance, this type of policy protects against claims of negligence, errors, or omissions in the performance of professional services.
• Property Insurance: This policy covers damage or loss of physical assets such as buildings, equipment, and inventory, due to events like fire, theft, or natural disasters.
• Cyber Liability Insurance: This policy provides protection if your business was to suffer data breaches or cyber-attacks It can help to mitigate losses and associated reputational damage.
• Directors and Officers Insurance: This policy protects directors and officers of the company against legal claims made against them for alleged wrongful acts, including breaches of duty, negligence, and other related issues.

It’s important to note that every business has unique insurance needs, and the types and amounts of coverage required will vary depending on factors such as industry, location, and size. It’s a good idea to consult with an insurance professional to determine what types of coverage are right for your scale-up business. It is important to communicate to help ensure that any levels of cover are balanced and proportionate to the company’s size in order to avoid risks such as underinsurance.

What Is underinsurance

Underinsurance is a significant issue for policyholders.  Recent research by the Royal Institute of Chartered Surveyors and the Building Cost Information Service suggests that around 80% of commercial properties have an element of underinsurance

What does underinsurance mean to me?

Underinsuring your business can create a significant financial problem for owners when they come to make a claim. Most policies contain what is called an average clause, which insurers use to ensure that claims paid are proportionate to the premiums they receive. However, policyholders must be aware of what this means for them.

If any property is underinsured, insurers will invoke what is known as the average clause, to limit their liability for any claims.

In practice it works as follows –

Stock Insured £100,000 The value the policyholder insured their stock for when they took the policy out.

Actual Value of stock £200- The amount a loss adjuster calculates the correct stock value to be.

£100,000 / £200,000 = 0.5

Underinsurance percentage = 50%.

If this property has a fire claim that causes £50,000 of damage, the insurer will invoke a proportionate remedy and reduce the claim settlement by the percentage that the stock was underinsured. In this example, the business owner would receive a claim settlement of £25,000, leaving them to find £25,000 from their own funds to replace what was lost.

REMEMBER – Underinsurance applies to any insured property. This can be the buildings, stock, contents, plant and machinery. It can also apply to things such as loss of rent and alternative accommodation, if this is based on your building sums insured.

How to prevent this from happening to you

There are a number of recommendations that you should follow to ensure that your policy is there for you when you need it most.

Commercial Buildings

It is essential that you ensure your rebuild cost is correct when you state this figure to your insurance broker.  Only 5% of insured clients correctly assess their rebuild costs in the first instance.

The only way to assess your rebuild costs accurately is to have a rebuild cost assessment done by a RICS’ (Royal Institution of Chartered Surveyors) firm. For most commercial properties, a site visit is required in order to correctly assess the rebuild cost. You should ensure that this is completed by a RICS’ organisation.

Rebuild cost assessments should be done every 3 years as a minimum, or whenever there is a significant change to the building. Remember, it is your responsibility as the policy holder to ensure that your property is insured for the correct values.

Index Linking

Index linking may or may not be applied to your policy, you should check your documentation to see whether it is included or not.  Index linking is used by insurers to reduce the risk of underinsurance, by increasing the sums insured at each renewal of the policy.

Index linking is based on a national average, so is likely to be insufficient on a policy by policy basis. Factors such as location, type of build and fluctuating material costs can have a significant impact on building rebuild costs, which are not addressed by Index Linking.

Plant, Machinery & Equipment

Issues occurring with your plant equipment or machinery can be very expensive. Remember, it is not only important to consider the direct costs of replacing machinery or equipment, but also the expense caused by delays to production, lost or delayed orders and additional labour costs.

The British Insurance Brokers’ Association (BIBA) strongly advises that all machinery (both hired and owned) is insured for the full value of replacing ‘new-for-old’.

Business Interruption

Delays in supply lines, labour shortages and rising costs of materials have also had a dramatic impact on the length of time it takes a business to get up and running again following a claim.  This has serious consequences if your business interruption indemnity period is not sufficient.

Summarising Underinsurance

Underinsurance poses a significant risk to your business, it is therefore essential that you act now and consider every element of cover that is required to safeguard your firm in case the worst happens. The information above addresses some of the issues you may face, but it is not an exhaustive list. You should always talk to us for advice on how you can reduce the specific risks that you face.

Why you need to notify your insurer

While you expand as a company, it is easy to focus on maximising expansion, without realising your more exposed. Scale-up businesses are at significant risk of underinsurance due to several factors:

• Rapid Growth: Scale-up businesses often experience fast-paced growth and expansion, which can outpace their insurance coverage. As the company grows, its assets, revenues, and liabilities increase, requiring higher coverage limits to adequately protect against potential risks. Failing to adjust insurance policies accordingly can result in being underinsured.
• Changing Risk Profile: With growth comes changes in the risk profile of a business. Scale-ups may enter new markets, launch new products or services, expand their workforce, or undergo significant operational changes. These changes can introduce new risks that may not be adequately covered by existing insurance policies, leaving gaps in coverage.
• Inadequate Assessment: Insufficient assessment of potential risks and failure to accurately evaluate the value of assets and liabilities can lead to underinsurance. Scale-up businesses often focus on revenue generation and operational aspects, sometimes overlooking the importance of comprehensive risk assessment and appropriate insurance coverage.
• Limited Insurance Knowledge: Entrepreneurs and founders of scale-up businesses may have limited knowledge or experience in insurance matters. They may not be fully aware of the potential risks their business faces or the specific insurance products available to mitigate those risks. Lack of expertise in insurance can result in underestimating coverage needs.
• Cost Constraints: Scale-up businesses often operate on tight budgets and prioritize allocating resources to growth initiatives. Insurance premiums can be perceived as an additional expense, and there may be a temptation to cut costs by reducing coverage levels. However, such cost-cutting measures can leave the business vulnerable in the event of a significant loss.
• To mitigate the risk of underinsurance, scale-up businesses should regularly review their insurance coverage in consultation with insurance professionals who understand their specific industry and risk exposures. It’s crucial to reassess coverage needs whenever the business undergoes significant changes or achieves milestones that affect its risk profile. Taking proactive measures to obtain adequate coverage helps protect the business from potential financial losses and ensures continuity in the face of unforeseen events.

Luckily, with an insurance company such as SJL Insurance Services, we offer flexible policies which is designed to expand and contract along with you. It is always important to check with your insurer what you can adjust once the policy is live. The best insurers will give you full flexibility when it comes to mid-term adjustments.

What to notify the insurer of

The insurer cannot protect you if they are not notified of any changes. The factors which could affect your insurance will depend on the policy, although
as a general rule, you should inform your insurer of any changes to your business that could affect your insurance coverage. This includes:

• Changes in business operations: If you change the type of products or services you offer, or if you expand into new markets or locations, it’s important to notify your insurer. Changes in operations can affect your insurance needs and may require adjustments to your coverage.
• Changes in revenue or employee count: If your business experiences significant growth or decline in revenue, or if you hire or lay off employees, you should inform your insurer. Changes in revenue and employee count can affect your insurance premiums and coverage limits.
• Changes in equipment or property: If you acquire new equipment, lease additional space, or make significant renovations to your property, you should inform your insurer. Changes to your equipment and property can affect your insurance needs and coverage limits.
• Claims or lawsuits: If your business is involved in a claim or lawsuit, you should notify your insurer immediately. Failure to report claims or lawsuits in a timely manner could result in a denial of coverage.
• Changes in ownership or structure: If your business undergoes a change in ownership or structure, such as a merger, acquisition, or reorganization, you should inform your insurer. Changes in ownership or structure can affect your insurance needs and coverage requirements.

It’s always best to err on the side of caution and inform your insurer of any changes to your business. Your insurer can help you assess your insurance needs and make sure you have adequate coverage in place to protect your business from risks and liabilities.

Why Do I Need a Specialist Broker

As scale up companies have moved from the start up or ‘seed’ stage, they can typically have insurance cover in place that is inappropriate for the business now, let alone where the business will be at the end of the year. At SJL we have extensive experience dealing with high growth companies, so we know how companies can evolve during the year, and how your insurance needs to be flexible enough to evolve with you. We don’t believe insurance is a once a year job, but something that we work with you on all year round, providing the service and products your business really needs.

To understand how your scale-up business insurance can help you grow, check out our scale-up business insurance