As the end of the financial year approaches, now is the time to reflect and ensure your business insurance is adequately protecting your company. For small and medium-sized enterprises (SMEs), this annual insurance review is not just a good practice — it’s essential to ensure your business remains covered as it evolves. Whether you’ve expanded operations, increased turnover, or even taken on additional staff, it’s important to reassess your insurance policies to reflect these changes.
At Delmont Insurance, we specialise in working with SMEs across Perth and wider Australia to provide comprehensive insurance solutions tailored to their needs. A thorough insurance review, especially before the new financial year begins, can ensure that your business is adequately protected against emerging risks, including potential business interruptions.
One key aspect of your business interruption insurance that often goes overlooked is the indemnity period and ensuring that both your gross profit and indemnity period align with your current and future business projections. This article will explain why it’s crucial to assess these factors, particularly as your business grows.
Understanding Indemnity Period and Gross Profit Coverage
Before diving into the specifics, let’s first define some key terms that play a major role in business interruption insurance:
- Indemnity Period: This is the period following an insured event (such as a fire, storm, or machinery breakdown) during which you are covered for lost profits or income while your business recovers. A common misconception is the length the policy will respond, it is not simply the period while you aren’t able to trade, but also while your business profits recover to a pre-loss level. This is often very important, because the full recovery can take much longer than expected.
- Gross Profit: In the context of business interruption insurance, gross profit refers to the profits your business would have earned had the interruption not occurred. This includes both direct and indirect costs involved in operating your business.
When reviewing your business interruption insurance, you need to make sure both the indemnity period and your gross profit are correctly aligned with your business’s operations and growth. If either factor is underestimated or incorrectly calculated, your business could face significant financial setbacks in the event of a claim.
Why Reviewing Your Indemnity Period is Crucial for Business Growth
The indemnity period is critical in determining how long your business will be covered for lost profits following an interruption. When setting this period, many businesses make the mistake of only considering the present day without accounting for future growth. This oversight can leave a business underinsured when it needs coverage the most.
- Ensuring Adequate Gross Profit Coverage
The growth of your business is a positive development, but it also means that your insurance coverage needs to evolve. If your business is growing in terms of revenue, inventory, assets, or staff, then your gross profit coverage must also increase.
When you initially set up your insurance coverage, it may have been based on a smaller scale of operations. However, if you’re growing by 10%, 15%, or even 20% each year, you need to ensure that your gross profit is accurately insured. Underestimating your gross profit or failing to adjust for growth could leave your business vulnerable during a claim.
For example, if your business has expanded from a $500,000 to a $600,000 gross profit annually, but your insurance still reflects the original $500,000, you may find that your coverage doesn’t adequately replace the actual lost income if a covered event were to occur. An accurate assessment of your current and projected gross profit ensures your coverage is sufficient to allow for a full recovery after a loss.
- Accounting for Future Growth in the Indemnity Period
If your business is experiencing rapid growth, the length of time it takes to recover from an interruption will likely increase as well. A business that is growing rapidly typically has more inventory, equipment, staff, and infrastructure to manage. As your operations become more complex, recovery times also tend to increase. This is why it’s important to not only ensure you are insuring the correct gross profit but also to factor in future growth when determining your indemnity period.
If your business is projected to grow by 20% over the next year, you need to take this into account when assessing how long it will take for your business to recover. A shorter indemnity period may be adequate for a smaller business, but for a growing business, recovery could take longer due to the increased number of moving parts. Without adjusting the indemnity period accordingly, you could be left without sufficient coverage during a period when it is hardest to get your business back on its feet.
- The Right Indemnity Period for Your Business
Choosing the right indemnity period isn’t just about covering your business for a set time. It’s about aligning the indemnity period with your recovery timeline. The right indemnity period should allow your business enough time to recover fully and resume normal operations. It’s important to consider not just how quickly you can physically recover from the interruption (e.g., fixing equipment or rebuilding damaged property) but also how long it will take to regain your customer base, operational capacity, and revenue streams.
For example, a business that relies heavily on a local customer base may face longer recovery times due to customer retention challenges. Alternatively, a business with global clients may have additional complications when getting products back to market. These different factors can contribute to the time it takes to get back to normal, and your indemnity period should reflect that.
How We Helped a Client Optimise Insurance, Expand Cover, and Reduce Costs
To illustrate the importance of an annual review and adjusting your coverage for growth, we’d like to share a recent example of how Delmont Insurance helped a client optimise their business insurance.
Last year, we worked with Retro Moto Co., a growing business in the motorcycle servicing and sales sector. Retro Moto Co. was facing an increase in demand due to expanded operations, which meant a rise in their inventory, assets, and staff. However, their existing insurance policies didn’t reflect these changes, leaving them underinsured in some key areas.
Here’s how we worked with them to improve their coverage:
- Optimising Coverage to Reflect Growth: Retro Moto Co. had expanded their service areas, added more stock to their showroom, and increased the number of employees. We worked closely with them to reassess the value of their assets and the gross profit, making sure their policies covered the increased turnover and operational scale.
- Reviewing and Expanding Business Interruption Coverage: They had an indemnity period of just six months, which was insufficient given the scale of their growth. We helped them extend the indemnity period to twelve months, ensuring that if they suffered a disruption, they would be fully covered for a longer recovery time, reflecting the increase in operations and complexity.
- Cost Reduction: Despite the expanded coverage, we were able to reduce their overall premium costs by negotiating better terms with insurers. We identified areas where they had been over-insured or where they could improve their risk management practices to lower premiums, without compromising on essential coverage.
The result? Retro Moto Co. was not only properly insured for their growing business, but they also saved a significant amount on their premiums, all while gaining peace of mind that they would be covered in case of a major interruption.
How to Ensure You’re Fully Covered
- Review Your Current Financial Information
As the end of the financial year approaches, it’s time to update your financial information. Take a deep dive into your financial records and make sure that your gross profit is up to date and accurately reflects the performance of your business. This is a crucial first step, as accurate numbers will ensure that your business interruption insurance policy is based on current values.
Many business owners overlook this step, assuming their previous policy is still appropriate. However, as businesses grow, so do financials. Make sure to factor in any new investments, expanded product lines, new locations, or increased revenue when calculating your gross profit. An accurate financial picture will ensure that your policy is reflective of your business’s current and future needs.
- Collaborate with Your Accountant
One of the most important things you can do when reviewing your business insurance is to work closely with your accountant. Accountants are essential in providing up-to-date and accurate financial data, and this information is crucial when adjusting your business insurance coverage. Having a clear understanding of your projected revenue and gross profit growth will help ensure that your indemnity period and gross profit coverage are properly aligned.
For example, if your business has plans for a major expansion, your accountant can help project the future financial impact. This information will be invaluable in setting the correct indemnity period and ensuring that your insurance coverage accounts for any expected changes in your business’s financials.
- Adjust Coverage to Reflect Business Growth
As your business grows, your insurance needs will change. It’s essential to adjust your coverage annually to reflect the increased assets, inventory, turnover, and staffing levels. Whether you’re expanding into new markets, purchasing more equipment, or launching new services, your business interruption insurance should be updated to cover these new risks.
An experienced insurance broker can help ensure that your business is properly covered by reviewing your policy each year and recommending adjustments based on your company’s evolving needs. This includes recalculating your gross profit, ensuring the indemnity period is sufficient, and reviewing other types of coverage, such as property damage or liability insurance, as your operations expand.
- Review All Types of Insurance
While business interruption insurance is crucial, it’s important not to overlook other types of coverage that could be just as critical for your business. As your business grows, you may find that other types of insurance — such as cyber liability insurance, professional indemnity insurance, and product liability insurance — become increasingly important.
Cyber insurance, in particular, is an area that many SMEs neglect, but it’s essential in today’s digital world. Businesses that rely on technology or store sensitive customer information should seriously consider adding cyber coverage to their policy. A cyber attack could disrupt your operations and cause significant financial damage.
Additionally, professional indemnity insurance is crucial for businesses that provide professional services, such as consulting or advice. This type of coverage protects your business in the event that a client makes a claim against you for negligence or poor advice.
- Work with a Trusted Insurance Broker
Navigating the complex world of business insurance can be daunting, but working with a trusted insurance broker can simplify the process. An experienced broker can help you assess your coverage, calculate your gross profit and indemnity period, and ensure that your policy accurately reflects your business’s evolving needs. Brokers also have access to a wide range of insurance products and can find the best options for your business.
At Delmont Insurance, we work closely with SMEs in Perth to provide personalised advice and tailored insurance solutions. Our goal is to ensure that your business has the right coverage to protect it from unexpected events while allowing it to grow and thrive.
Why Choose Delmont Insurance?
At Delmont Insurance, we understand the unique needs of SMEs in Perth. Our tailored insurance solutions provide comprehensive coverage that evolves with your business, ensuring you have the right protection at every stage of growth. By working closely with you and your accountant, we ensure that your business interruption insurance and indemnity periods are carefully reviewed and adjusted to suit your needs.
Whether you’re expanding, investing, or simply reviewing your coverage, we’re here to guide you through the process and help you make informed decisions about your business insurance. With a focus on risk management and personalised service, we’re the Perth insurance brokers who work hard to safeguard your future.
Booking in your Insurance Review
Don’t wait until it’s too late. The end of the financial year is the perfect time to review your insurance policies. Contact Delmont Insurance today to schedule your insurance review and ensure your business is fully covered for the new financial year. If you are based in Perth, feel free to come into our office located centrally in West Perth, otherwise please reach out on the below.
Contact Delmont Insurance Group today on (08) 6184 8724 or via email at info@delmontinsurance.com.au.
Article written by James Wilson, Director of Delmont Insurance Group — a trusted adviser and specialist insurance broker