THE VALUE OF INSURANCE

Should I cancel my insurance to save money in a recession? This is a fair question, as people look to reduce costs in anticipation of an economic slowdown. In this article, Builtin reviews different types of insurance, potential areas for saving and the impact of cutting, or reducing, each type

The value of insurance is that you pay a predictable, regular amount (the premium) to protect you from a large, unexpected, unbudgeted cost that would severely affect your financial situation if it happened.

In tough economic times, a big, costly, unforeseen event can be much harder to recover from. This is because you may not have the same level of savings or ability to borrow as when the going is good. This makes having insurance during a slowdown even more important!

We believe that instead of seeing your insurance premium as a cost that can be cut back, think of it as an investment you’re making to protect yourself from an even bigger, unexpected cost.

However, if this is something you’re considering, the real question you should be asking is: what risks am I prepared to take on myself rather than being insured for?

Here are some things to consider as you review your spending on insurance.

PUBLIC LIABILITY AND PROFESSIONAL INDEMNITY
These policies protect you if you (or someone else you’re responsible for) makes a mistake that causes a third party a loss and they hold you responsible. Mistakes can happen anytime and, by their nature, are unexpected, so you can’t plan for them. The worst ones can be very costly, so unless you have put aside a big pile of money to cover this possibility, insurance is a good investment.

Secondly, having a break in cover is not recommended, as this can have consequences down the line.

With public liability insurance, the trigger for a claim is when the damage happens, which in some cases could be months or years after you completed the job (eg, a water pipe installed incorrectly and bursting or an electrical fire). To have cover, the policy must have been in place at the time the damage occurred, but does not have to be in place when you are notified of the claim.

With professional indemnity insurance, the trigger is when you are notified of the claim, so you need to keep cover in place even after the job is finished. If you cancel it or have a break in insurance between the event (such as someone employed by you misinterpreting a design, causing financial loss) and being notified of the claim, you will have no cover at all.

Homeowners that are under financial stress can be more likely to kick off a dispute. We have seen situations where a builder’s customer made up issues with workmanship to get out of paying bills. The right insurance will cover your legal costs in the event of allegations of damage or professional negligence.

Savings can be made at renewal time if you anticipate your turnover (gross income) being lower, as premiums are based on turnover. Bear in mind there are minimum premiums and different insurers calculate premiums at different levels, so a small drop (or increase) in turnover may not affect your premium if you still sit within the same turnover band.

EMPLOYEE DISPUTES LIABILITY
If you think you may have to make changes to your employment relationships, cut hours or lay off staff in the coming months, employee disputes liability cover is worth investing in, if you don’t have it already. This protects you from claims of unfair dismissal, discrimination, harassment and other situations where a disgruntled ex-employee may take a case to the Employment Relations Authority.

STATUTORY LIABILITY
This covers your liability for fines and penalties under law. One of the main benefits is that it covers the legal costs and reparations awarded for prosecutions under the Health & Safety at Work Act, however it cannot legally insure WorkSafe fines though.

It’s not clear yet how WorkSafe will approach breaches of the tough new guidelines for managing Covid-19 exposure on site. A potential worst-case scenario could see someone contract the disease from a site then pass it on to someone else, perhaps an older person or someone with respiratory issues, who dies. Could this trigger a WorkSafe investigation? If a breach of good practice guidelines was found, could this lead to a prosecution?

VEHICLE
These are valuable assets for most people. An accident that is your fault can also expose you to the cost of repairing other vehicles or property involved.

One way to optimise your premium is to ensure your business vehicles are insured for their current market value, not how much they were worth three years ago, and that the amounts insured are excluding GST (the insurer will add this on in the event of a claim).

You could also reduce your cover from full/comprehensive to third party, fire and theft, or even third party only. However, this will leave you responsible for cost of damage (or theft or fire) to your own vehicles.

TOOLS AND EQUIPMENT
At the best of times, tool theft is fairly common. In an economic downturn, not only is theft more likely, it could also be harder to afford to replace your stolen ones. You may have to settle for cheap alternatives, and any time you’re off the job due to being without them is costing you money too.

If you can’t afford to insure your tools, you may want to consider what security measures you have in place to reduce the chances of them being pinched. Are they stored in the back of your ute parked on the street? Is your garage alarmed?

LIFE, HEALTH, MORTGAGE AND INCOME PROTECTION 
The value of these policies doesn’t change in a recession. In fact, if your policy includes cover in the event of redundancy, you are probably a lot less worried than many at the moment.

The benefits of the others are also in many ways greater at this time. Alternative employment may be difficult to find if you get sick and have to get off the tools, and the financial burden on your family if you died could be even harder to bear.

If the premium is too high to afford at the moment, review your policy. It may be able to be adjusted by changing the level of income you’re insuring for, or extending your stand down periods.

PAYMENT OPTIONS
Many insurers and brokers (through premium funding services) offer monthly payment plans that allow you to spread the cost throughout the year. They typically come with fees and interest, but the cashflow benefit of not having to pay all at once can outweigh the extra cost.

IN A NUTSHELL
Insurance may seem like a cost that can be cut, but make sure you think through the implications of doing so. There are alternatives to cancelling policies, like adjusting cover amounts, revising turnover estimates and switching to a monthly payment plan. Before you do anything, ask yourself the question “What risks am I prepared to take on myself rather than being insured for?”

 

Builtin are New Zealand’s trade insurance experts. For more information visit www.builtin.co.nz, email Ben Rickard at ben@builtin.co.nz or call him on 0800 BUILTIN.