Play it safe

Founders are distinguished by their business ideas—less often by ample financial cushions. Therefore, insurance is essential to avoid having to give up at the first sign of a loss.

This article is part of the special feature GründerNavi – for founders and young companies

The less money a business has in reserve, the more comprehensive its provisions must be. While this isn't cheap, some types of damage have the potential to ruin it.

There are two categories of risks

1. Risks that threaten the company's continued existence should be covered first, regardless of the probability of their occurrence. The mere possibility that they could affect the business is enough to shift the risk to insurance for safety's sake. Focusing too heavily on the probability of occurrence rather than the potential damage can later prove to be a tragic mistake. Legal liability usually has no limits.
2. Secondly, it's about protecting against risks that could result in expensive damage to your assets, such as buildings, machinery, and vehicle fleets. The probability of occurrence is also secondary.

The general rule, of course, is to insure as little as possible, but as much as necessary. The more cushion a business has, the more likely it is to be able to draw on it in an emergency for minor and perhaps even medium-sized claims. Tip: One way to reduce insurance premiums somewhat is to include deductibles. Each business has to decide for itself how much damage it can handle in case of doubt: would it be better to cover €500 or €5.000? However, the focus should not be on savings, but rather on coverage.

Liability insurance policies belong to the first category of insurance policies . While these are based on statutory liability, be careful: they don't cover it exactly! In most cases, the law stipulates unlimited liability, but insurers only provide limited coverage. Therefore, it's important not to skimp on the coverage amount, as this represents the upper limit of reimbursement.

The most important liability policy is business liability insurance . It covers claims for damages from third parties, such as customers, residents, or employees. The liability insurer also defends against unjustified claims. In this respect, it essentially acts as a form of legal protection. This is just as important as personal liability insurance for the business owner and their family, which is usually included free of charge. However, liability policies for particularly serious risks, such as environmental damage, defective products, or purely financial losses (e.g., from a hacker attack or unethical accounting practices), incur additional costs.

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The second category includes policies such as building and business contents insurance . The building and its contents often represent the majority of the company's assets. These can be insured against the usual risks of fire, lightning, explosion, hail, storm (from wind force eight), water damage, and burglary. Discounts on the insurance premium are available for things like fire alarms, fire suppression systems, sprinklers, and alarm systems.

The risk catalog can be expanded for an additional fee, for example, to include natural hazards. Anyone who wants can insure their machinery or their IT. So-called cyber insurance not only covers the damage caused by the company to others, for example, by forwarding a contaminated email. It also covers so-called first-party damage, such as the recovery of contaminated data and programs, up to and including the costs of a total business interruption (BI).

However, disability coverage under cyber policies should not be confused with traditional disability insurance policies. A virus infection is not considered property damage in insurance jargon. Traditional disability insurance, however, requires that property damage has paralyzed the business. Therefore, if fire or water damage is responsible for the business shutdown, the insurer will cover the fixed costs that continue to accrue even though no work can be carried out or anything can be earned, such as wages, rent, and interest.

Different interests

Anyone who finally assesses their risks and looks for suitable insurance is spoiled for choice. This starts with the broker and doesn't end with choosing the insurance company. Because with many policies, the right amount is crucial. Therefore, most people are well advised to consult experts. This is no less advisable with insurance than with filing a tax return.

The key differences lie in the type of remuneration. A traditional insurance agent earns a living from the commission included in the premium. Insurance brokers are the same, except they call it brokerage. Essentially, though, it's the same thing. Both rely on successful sales. Caution: Comparison platforms often act as brokers, even if they like to present themselves as neutral information platforms.

Fee-based advisors operate differently. Here, the client pays based on the consultation time. Payment is therefore not dependent on the insurance purchase. On the contrary, the client must then purchase the necessary policies themselves. Incidentally, brokers and advisors are required to disclose their "status information" upon initial business contact. This includes their name, business address, registration number, and arbitration board. 

Correct behavior in the event of damage

• Monitor your insurance policies. Check your contracts at least once a year to ensure they still reflect your business circumstances.
• Avoid underinsurance. Underinsurance means that a loss is only compensated up to the insured amount, not the actual value. Determining the correct insured amounts is often difficult. With property insurance (fire, business interruption, burglary), you must proceed as if you had to replace everything in your business on the date of the loss.
• Observe "duty of danger". A description of the insured risk and the hazardous circumstances is an important part of your contract and a prerequisite for insurance coverage. You must notify the insurance company of any operational changes. Examples: Burglary insurance: erecting scaffolding, removing the alarm system; fire insurance: adding a new business with a fire risk, installing heating coils in drying rooms.
• Fulfill all "obligations". Obligations are the policyholder's duties prior to conclusion of the contract, during the term of the insurance contract, and after the loss. Violation of these duties generally results in the total loss of insurance coverage. Information on these duties can be found in your policy.
• Create a disaster plan. A disaster plan must contain at least the names, addresses, telephone and fax numbers of all employees who must be notified after a loss, as well as the police, fire department and insurer.
• Store business documents securely. Store as many business documents as possible in secure locations so that you can prove your loss in the event of a loss.
• Keep the damage as minimal as possible. Act as if you were uninsured and help mitigate the damage. Failure to take rescue measures may result in the total or partial denial of compensation claims.

Source: German Federation of Insured Entrepreneurs (BvU)