One of the drawbacks to owning a growing business is having more at stake. An expanding business is likely to be having dealings with an ever-increasing number of individuals, getting involved in a wider range of commercial activities, even expanding into new locations.
A growing business usually requires a growing workforce. With more equipment and larger premises come more expensive rent payments. In such circumstances, any revenue-disrupting interruption to its activities can soon escalate into a cashflow crisis.
In short, the cover that was sufficient when you were a sole trader or running a scrappy start-up isn’t likely to be adequate once you’re heading up a thriving enterprise. The end of the financial year is a great time to think about how your business has changed over the last 12 months and review your insurance policies.
“The cover that was sufficient when you were a sole trader or running a scrappy start-up isn’t likely to be adequate once you’re heading up a thriving enterprise”
Directors’ and officers’ insurance
A growing business will inevitably become more hierarchical and possibly move from a sole trader or partnership business structure to a company one. In any largish enterprise, there are individuals – executive directors, non-executive directors, executive officers and senior managers – who shoulder important responsibilities.
Understandably, these people don’t want to be placed in a position where they could suffer personal financial loss as a result of doing their job. By providing directors’ and officers’ insurance, a business owner can provide cover to key staff and board members. That means they can be reimbursed for their legal costs if competitors, creditors, employees, liquidators, regulators or shareholders take legal action against them.
Business interruption insurance
The more your business grows, the larger its fixed costs are likely to be and the more expensive an interruption to its smooth functioning will become. A suburban café may only be out of pocket a few hundred dollars if a blackout means it has to shut down for the afternoon. In contrast, it’s estimated Starbucks’ recent decision to close its US stores for an afternoon (to provide racial-bias training to staff) cost around US$12 million (NZ$17.5 million).
If an unfortunate event means you need to shut up shop, your revenue will typically be severely impacted during the shutdown period. Nonetheless, you’ll probably continue to face the usual wage, rent and other business costs. Business interruption insurance can provide a pay-out to cover you for those costs, as well as make up for lost sales.
In the digital age, an IT issue can be as devastating as any fire, flood or storm. The two threats businesses, especially smaller ones with limited IT budgets, most need to worry about are ransomware attacks and data theft.
A ransomware attack results in a business’ files being encrypted. Important data is rendered inaccessible, which can make it difficult or impossible for a business to keep operating – until a ransom is paid to return things to normal. It’s estimated that, globally, ransomware inflicted US$5 billion (NZ$7.25 billion) of damage in 2017.
Governments in New Zealand and elsewhere are tightening privacy regulations and stiffening financial penalties for data breaches. If a malicious actor overcomes your cyber security and captures your customers’ personal data, the consequences can be more serious than brand damage. You could find yourself being investigated by the government regulator and being sued by your customers. As explained more fully here, cyber insurance can help cover financial losses arising from a cyber security breach.
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