When bushfires hit, we tend to think of the number of homes that have gone up in flames, not the number of businesses that have been destroyed.
The Insurance Council of Australia estimates that 70 per cent of underinsured and uninsured small businesses never make it through a major event such as a fire, earthquake or storm.
What goes wrong? Many small-business owners tend not to value their assets (or their future earned income) properly. Cameron Douglas, NSW client services manager at insurance broker Marsh Australia, says insurance is a moveable feast – effective cover has to keep pace with both present and future needs.
Simply taking out a “fire and perils” policy and not checking the current value of reconstructing your business is where many businesses and property owners err.
“There is plenty of cover for extraneous perils,” Douglas says. “The biggest challenge is to the get sums insured right and to correctly estimate the costs of rebuilding.
“You only get what the business is insured for – if that's only two-thirds of the costs to replace the business it may mean the business is forced to close or have to extend debt to make up any shortfall.”
Douglas warns that in areas of fire risk, there are often costly rebuilding requirements mandated by local councils which have been legislated over the years, often unbeknownst to business policyholders.
These new regulations – which may include rebuilding with fire-retardant materials, regulations on the thickness of glass and/or the inclusion of fire-suppression systems and water pumps – could potentially add as much as $100,000 to $150,000 to a rebuild.
Donna Stewart, executive manager of claims at GIO Insurance, says stock and contents from fire damage must also be considered when insuring. That is, assets such as commercial vehicles and portable equipment.
“Business interruption insurance can also help you recover while your trading has ceased, including paying of staff wages and other outgoings,” Stewart says.
Thinking ahead pays dividends. Stewart mentions photographing important insurable items, as well as keeping asset registers and financial records off site.
“You should also think about business continuity. What happens if you are unable to use your premises for an extended period? It doesn't hurt to think about possible temporary premises and how you will keep in touch with your staff and customers,” Stewart says.
Does all this mean higher and higher premiums? Douglas says that fire insurance has never been costly and that good preventative management can reduce premiums.
Douglas cites the example of a client who had a factory which he had tenanted out but which gradually fell into a state of poor repair and the tenants moved out. The client also owned another factory of a similar size only a couple of suburbs away which had a tenant who kept the premises well maintained and free from build-ups of potentially flammable waste materials. Both were insured by the same insurance company.
When the insurance company did a spot audit and visited the two buildings, the first factory suffered nearly 70 per cent loading of the premium due to the potential for fire to occur. Only when the owner agreed to tidy up the premises and later attracted a new tenant did the premium fall substantially back to levels comparable to the second factory.
“The same occurs when properties are in fire-prone areas,” says Douglas. “If there are two premises side by side and one has good sprinklers and fire-suppression systems as well as good separation of the boundary of the premises and bush – and the other has junk in the yard, is poorly kept and lacks fire extinguishers, there will be a difference in the premium rate.”
Interestingly, there are tax implications for those who have lost business premises or major business assets in a fire.
Sean Urquhart, a partner at accountancy firm Nexia Australia, says the Australian Tax Office can implement concessions and relief for businesses affected by bushfires.
“If, for instance, you're due a refund, they may bring the refund forward to help the business owner,” he says.
There are also concessions made for business records lost in fires – the tax office may even help owners try to recreate records that have been lost.
Importantly, there are roll-over relief provisions for those who have received insurance payouts after premises or assets have been destroyed. If the payout constitutes a capital gain on any asset destroyed, the ATO can allow tax on the gain to be deferred until after the replacement asset has been sold.
Similarly, if you are underinsured or not insured at all, it is also possible to have a deductible loss on some depreciable assets that may have been destroyed. “If you have, say, a printing press that gets destroyed – you can scrap that for zero and get a tax write-off,” Urquhart says.