BUSINESS DISRUPTION: Risk Management for SMEs

Estimates suggest that roughly 65% of Canadian small to medium size enterprises (SMEs) engaged in manufacturing currently do not have equipment breakdown coverage, according to research by the Boiler Insurance and Inspection Company of Canada (BI&I).

Clearly the owners of small and medium size businesses are reluctant to pay additional premium for extended coverage over and above their standard commercial property insurance, observes BI&I president Hans Schols. “It’s a competitive environment out there, and smaller operators have to leverage their resources as much as they can to stand up against larger corporate businesses. It’s easy to see why the owner of a smaller business would be reluctant to spend the extra money on insuring against the breakdown of a piece of equipment when it could otherwise be spent on growing the business.” However, the business and economic loss arising from business disruption runs into millions of dollars every year, Schols points out.

There are several factors influencing the current lack of coverage by SMEs against business disruption losses, Schols says. In addition to “running the gamble that a loss won’t arise”, most owners of small businesses are not aware that their standard commercial property insurance excludes many business disruption losses, such as equipment breakdown. Most small businesses rely on a broker to guide them through their insurance needs, he adds, and while brokers are well aware of the additional coverage options available over standard property insurance, some of them are not comfortable with selling a product with added complexities.

BI&I holds 37% marketshare of equipment breakdown insurance in Canada. In addition to dealing with 4,000 brokers countrywide, the company also acts as reinsurer in this particular line of business and deals with approximately 50 insurers.

Typically, the standard commercial property policy in Canada excludes electrical breakdown, mechanical breakdowns, the explosion of steam boilers and piping — generally any financial business loss incurred from breakdowns, Schols explains. These risks were previously underwritten under “boiler and machinery insurance” but which has now been expanded under “equipment breakdown insurance” to cover a broader range of exposures from security and communication systems to equipment breakdown caused by human error or negligence. “Equipment breakdown coverage as a class of insurance has grown in scope in recent years as manufacturing has changed,” he adds.

Coverage of equipment breakdown and business disruption can be included as “all risks” under a commercial property policy — which in the U.S. has become fairly common practice. However, this is not common in Canada, Schols notes. “Unlike the vast majority of casualty and property insurance, equipment breakdown coverage insures against financial loss… Most small manufacturers don’t hold this type of coverage because they don’t understand the impact equipment breakdown can have on the interruption of business. We encourage our brokers and the companies we deal with to recommend ‘all risk’ coverage to their clients rather than a ‘mono-line’ approach. And, while ‘all risk’ is becoming more accepted in Canada, there is still a need to educate the insurance buyer of the benefits.”

To create greater awareness of equipment breakdown cover, BI&I hosts several broker training seminars around the country, some of which qualify under the profession’s extended education credit program. “We recommend that manufacturing firms of all sizes get an insurance broker to review their equipment and identify the risks and exposures that a breakdown may cause,” Schols says.

Many small to medium size enterprises (SMEs), which do not have the benefit of retaining a risk manager, are unaware of the extent of non-insured exposures that could threaten the life-line of their operations. Research by a leading specialty line insurer suggests that only about a third of Canadian SMEs, from hotels to farming operations, are adequately insured against business disruption arising from equipment breakdowns.