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How to open a store, part 6: Insurance

“Insurance is never that interesting until it’s your brand new store that’s gone up in flames,” says Guy Worsley, senior broker at Rothbury.

He’s right – it’s easy to consider disasters like fires and ram-raids, but not so easy to weigh up the paperwork and invest in insurance to make sure these don’t cripple your fledgling business before it’s begun.

According to the Insurance Council of New Zealand, only one in four small to medium-sized businesses is adequately insured.

Getting started early on sets the scene for cheaper premiums later on as the company continues to grow and the company acknowledges your loyalty.

Insurance is no more intimidating than reading a legal contract, Worsley says.

“It’s not intended to be jargon, it’s not intended to be confusing.”

Rothbury’s retail-specific ‘Retail Ready’ product for Retail NZ members is intended to fix this issue.

Worsley says new retailers should start looking into insurance at the time they’re doing a forecast or business plan for their brand-new shop as these costs must be factored in.

The factors that will be assessed when insurance companies calculate your premium include:

  • Whether you own your building, lease it or work from a home office.
  • The value of your assets, turnover and profit figures.
  • Attractiveness of your stock to thieves.
  • Location issues (for example, flood risk from a nearby river).

Worsley recommends retailers have insurance in place by the time they become financially responsible and liable for assets such as stock and premises. Many commercial leases will require the tenant to take out and maintain insurance with regards to the building from the time they sign the lease.

The landlord’s insurance will cover the building, including frequently-damaged areas like the front window, but retailers should keep in mind that any fit-out they’ve installed, or contents like shelving and the till, will not be covered by the landlord’s policy.

Worsley says that under the Retail Ready product, it’s possible for retailers to arrange a temporary or permanent replacement pane of glass themselves. Rothbury will sort out the claim by dealing behind the scenes with the landlord’s insurance company.

Worsley says green retailers setting up an independent business from scratch may well run into a few more hurdles than established operators: “Companies can be somewhat skeptical of new entrants into a market.”

He says if this is the case, retailers may be asked to sign personal guarantees with their family home as security.

“Far better to buy an insurance policy than put your house on the line,” Worsley says.

Insurance is about cash flow, he says, and in the early days of a business, cash reserves are “probably as low as they will ever be.” The idea is that in the event of a disaster, insurance will replace the cash flow which would otherwise be lost, making sure no competitor has a chance to fill your niche in the market.

Key points of vulnerability to consider covering are:

  • General and products liability.
  • Employers liability.
  • Employment disputes.
  • Internet and fidelity (crime against the retailer by their staff).
  • Stock and property.
  • Loss of property.

For retailers banking on the pre-Christmas shopping rush, it’s possible to get a seasonal stock adjustment clause which will increase your cover during the months that you’ve got extra stock on board.

It’s also worth thinking about business interruption insurance, plus travel and transport.

For those struggling to incorporate insurance costs into their business plan, a good way to reduce premiums is to take a higher excess on your policy.

This story originally appeared in NZ Retail magazine issue 745 August/September 2016

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