Insurance can prevent a fire sale
It was a large cheque - a weighty eight figures.
Amid the trauma of near-total destruction, with the uncertainty of so many families' livelihoods, the family that owns Doric Products decided to try to save the business. Looking back, Doric's general manager, Nigel Long, says if they had known the odds of a business surviving such a catastrophe, maybe they would have taken the cheque.
But this true story has a happy ending. Doric Products became a substantially different business because of the fire, changing from a large heavy engineering operation into a more streamlined light engineering and warehouse/distribution business. It is now a poster boy for productivity improvement and workforce engagement - one of the stories told in the Australian Industry Group's max360.com.au productivity program.
"The fire developed a change mentality in the business," Mr Long says. "If you can survive a fire, there's no problem changing a process or moving a bench. There is no hurdle too high. If there's an opportunity to change something or do it better, you can do it."
The renewed appreciation of the workforce changed and continues to change the company, making it more open from top to bottom. Change comes from all levels - the person at the top is not the font of all wisdom. The company's profit and performance is regularly discussed with the whole workforce. It is a great story.
But for the purposes of a column about business insurance, an important sidelight is that insurance issues were part of the stress in the aftermath of the fire.
The offer of a single cheque to walk away factored in the value of plant and equipment lost, but also an estimate of what business interruption insurance would cost the insurer in the months ahead. The longer the business continued, the less the offer of settlement would be.
Business continuity insurance, particularly for smaller and younger businesses, is a frequent area of under insurance or no insurance, but the odds of a business surviving a significant interruption without it are slim.
Continuity insurance pays wages, rent, fixed costs, advertising, estimated profit - all the stuff that would otherwise send a business broke when the customers can no longer walk in the door but the bills keep coming. Of course, the estimate has to be right in the first place of what the profit would be.
And then there is the bit called additional increased cost of working - renting and relocating to new premises if the front door has been obliterated. It is not just what has been lost that costs, it is the extra cost of getting re-established. Insurance companies think of everything - as long as you do, too, and measure it and are prepared to pay for it.
On one industry measure, only 31 per cent of small businesses have business interruption insurance. Apply the odds of surviving a significant interruption without it and that means about 30 per cent of small businesses won't survive such an interruption. Depending on the size and type of the disruption, an unquantified percentage don't survive with it.
By the nature of insurance and risk, Donald Rumsfeld's "unknown unknowns" play a role in the decision to insure or not to insure. For those happy businesses with the wealth to be able to self-insure - to have the money in the bank to be able to carry the costs of some of their known risks - those unknown unknowns can prey on the mind.
One proffered small business case study illustrates such a risk. Not as grand as Doric Products' life-changing fire, but a burst water main outside the front door that closed off traffic for a week: all the wages, the rent, the interest charges, none of the income.
When interviewing Mr Long for the Max360 project, a thought occurred: how good a tool or process would it be for any business to have a virtual fire? Mr Long thought it was a fine idea - much less painful than the real thing.
Michael Pascoe is a BusinessDay contributing editor.
Frequently Asked Questions about this Article…
Business interruption insurance protects your business from losses when unexpected events, like fires or floods, stop normal operations. It covers expenses such as wages, rent, advertising, and estimated profits, helping your business stay afloat while recovering. Everyday investors should consider this coverage seriously to avoid devastating financial hits when income stops but bills keep coming.
After a huge fire gutted their factory, Doric Products faced a tough choice: accept a large insurance payout and close or rebuild. Thanks to solid insurance coverage including business interruption, they chose to save the business. The insurance payout covered lost equipment and ongoing costs, giving them a vital lifeline to transition into a leaner, productive operation.
Many small business owners either underinsure or skip business interruption insurance altogether. This means when disasters strike, they lack the financial cushion to cover fixed costs like rent and wages. This oversight often leads to a high risk of business closure after interruptions, as about 70% of small businesses without proper coverage don’t survive significant disruptions.
'Additional increased cost of working' refers to extra expenses a business might incur to keep operating after a disaster. For example, renting temporary premises or relocating equipment if your main location is damaged. It’s an important part of insurance coverage because recovery isn’t just about what’s lost, but also about the extra costs of getting back on your feet.
Absolutely! As seen with Doric Products, surviving a crisis like a fire can create a 'change mentality.' When a business confronts major disruption and comes out stronger, it fosters adaptability, openness to innovation, and workforce engagement. Insurance provides the safety net that enables such transformation without the fear of financial ruin.
Surprisingly, only around 31% of small businesses carry business interruption insurance. This low adoption leaves nearly 70% exposed to severe financial risk if operations are halted. Everyday investors should weigh these odds and consider whether their business is prepared to survive unexpected interruptions without insurance.
First, accurately estimate your potential lost profits and fixed costs like rent and wages. Make sure your insurance covers these adequately. Don’t forget to include additional expenses like temporary relocation or equipment rental. Regularly review your policy as your business grows or changes to avoid surprises when you need coverage most.
Yes! Running 'virtual fire' or disaster drills can help businesses test their resilience and readiness without real damage. Simulating a disaster scenario allows you to identify weak spots in planning, financial arrangements, and workforce communication—helping you be better prepared to bounce back if the unexpected happens.
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