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.
Frequently Asked Questions about this Article…
Doric Products suffered a major factory fire, was offered an eight-figure insurance cheque but chose to rebuild and reshape the business. The firm emerged as a leaner light-engineering and distribution operation and became an example of productivity improvement and workforce engagement. For investors, it shows how catastrophe, insurance decisions and management choices can materially change a company’s operations, costs and future performance.
Business interruption (continuity) insurance pays for the ongoing costs a business still faces when it can’t trade: wages, rent, fixed costs, advertising and estimated lost profit. It can also cover extra expenses to keep operating, helping prevent a temporary disruption from turning into permanent failure.
An insurance assessor estimates the value of lost plant and equipment and calculates projected business interruption costs the insurer would pay in the months ahead. Insurers may offer a lump-sum settlement that reflects those items; importantly, the longer a business continues operating during a claim process, the smaller the insurer’s settlement exposure can become.
Industry measures cited in the article show only about 31% of small businesses have business interruption insurance. Cost, lack of awareness and the difficulty of estimating potential profit and interruption losses mean many small or younger firms are underinsured or choose no cover—leaving them with slim odds of surviving a major disruption.
Additional increased cost of working is an insurance item that pays for extra expenses to get re-established after a loss—like renting temporary premises or relocating production if your front door is destroyed. For investors, it’s key because it explains why an insured business may recover faster and preserve value compared with one that only insures physical losses.
Some wealthier businesses choose to self-insure—keeping cash reserves to cover known risks—but the article warns about ‘unknown unknowns’. Self-insuring can work if a company truly has the funds to absorb a major interruption, but it leaves owners exposed to unpredictable, potentially business‑ending events if reserves are insufficient.
Yes. The fire triggered a ‘change mentality’ at Doric: the company streamlined operations, became more open top-to-bottom, engaged staff in performance discussions and improved productivity. The disruption helped reset processes and culture, illustrating how a crisis can catalyse beneficial change when managed well.
The article suggests a low‑pain idea: run a ‘virtual fire’ or simulated disruption to test processes and preparedness. Mr Long from Doric thought a virtual exercise would be a useful tool to reveal weaknesses and improve readiness without the costs and trauma of a real disaster.
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