The Finance Director was smart, knowledgeable and worked long hours. His company, a manufacturing business was doing ok, it was growing despite difficult trading conditions.
He was a busy guy, and insurance arrangements were well down his important tasks list. The company renewal date was fast approaching as he met his broker. He check the sums insured, run through the pricing and renewed the policies as before and at a similar price. All was ok, the business had barely had a claim for years so more of the same was fine.
How was he to know that 4 weeks later these actions would haunt him forevermore?
They say ‘the devil is in the detail’ and a lack of attention to detail meant:
- His company share price dropped dramatically causing a banking covenant to be breached
- Company cash-flow would be hit to the tune of £1.75m
- Investors were calling for his head
- 43 employees had to be made redundant
- The reputation of the board was severely damaged
- Suppliers became reluctant to give any credit period on supplies delivered
- Clients became reluctant to buy their products, for fear of non-delivery due to business disruption.
I know, seems like a scare story doesn’t it? But, trust me, this is absolutely true. A serious lack of attention to ‘the detail’ meant that the insurers declined a large claim. Quite simply, they refused to pay the claim because they said it wasn’t covered.
Why does this matter to Accountants & Other Business Advisers?
The thing about business success is that risk taking is an absolute necessity. It’s really the only way to get ahead of competitors, to stand out, to be different. The problem with the upside of successful risk taking is that it can have an equal and opposite effect that can destroy your clients dreams.
Lets get the back of a fag packet out. It’s estimated that some one percent or more of UK start up’s alone over a 5 year period will fail due to disaster, fraud or incidents that can be insured against. Apparently there have been some 2 million start up’s across all industries over the last 5 year’s.
A one percent failure rate simply because a risk wasn’t insured, or wasn’t properly insured, means that some 20,000 start up companies go bust as a result of insurance related failure. That seems pretty daft to me.
There are many things that can cause the failure of a business including loss of cash-flow, reputational damage, legal battles, product recall and so on. In addition, there is the personal risk of your clients being sued as a consequence of their role as directors by investors, regulators, HMRC, employees, suppliers and many other stakeholders.
Globalisation of trading and supply chain systems has intensified risk exposures. Trading across different countries magnifies the legal risk to directors.
It is worth pausing to think what your clients would do if any of this happened to their business. It could be an absolute disaster. Imagine if their supply chain failed or they infringed someone’s Intellectual Property? Imagine the anger of investors if they failed to insure properly against interruption to which caused the value of the business to drop, or even fail?
But also, if you are providing audit services then stakeholders could question your service to your clients. What was the process for checking that the insurance programme protected the company balance sheet/cash-flow properly? That it would actually pay out when it was most needed?
My point here is this. Risk management and insurance protection are vital, boring though that stuff sounds when your clients are pushing their business forward. It doesn’t matter if they are a 3 employee firm or 300 employee firm, the dangers that lurk are powerful and out to get them!
So it’s worth pressing your clients on this. Risk and insurance are complex beasts. Make sure they get help to properly assess just where their exposures are and what they will do to protect the business against them. Should they leave the risk exposure as it is, manage the risk or transfer the risk to insurance companies?
All insurance policy wordings are different (there are over 1,000 general insurance companies authorised in the UK). They only way to know if your clients have the right wording is if they understand all their risks. The warranties and conditions within policy wordings can be hidden away and very onerous.
By the way, the average length of a policy wording is 30,000 words. That’s the same as the average novel. And your clients will probably have several policies.
Watch out if your clients are buying their insurance protection online. I know there is the impression that it will be cheaper but I promise you, the devil is absolutely in the detail. Again, they should be sure the policy would actually protect them when they need it and there is no doubt that’s its safer to discuss this with a decent broker.
Importantly, if their broker isn’t taking the time to prepare a visual risk map for them, they should change broker.
Many businesses see dealing with insurance as a distraction, something to get over and done with as quickly as possible at the lowest price. Encourage them to take a little time and thought here because one day they may wish they hadn’t been so rushed over it.
Growth businesses need to clearly understand where it can all go wrong and not just think because its all going well at the moment, it will continue to go well. They should construct a plan to protect against the downside. As a result they, and you, will have the confidence that it’s safe for them to push on and take the necessary risks to grow, knowing that their back is protected.
The JMS Blog 