Even a small business can keep thousands of pounds worth of stock. To help protect against financial disaster if this stock is lost, damaged or stolen, most businesses buy stock coverage as part of their business insurance package. Here's what you need to know about stock insurance including common exclusions and who needs it.
What is Stock Insurance?
Stock insurance covers your stock if it's lost, stolen or accidentally damaged. For example, stock insurance enables you to replace your stock if it's damaged in a fire or flood or if a thief breaks into your business and steals your inventory. A policy can have the option to either pay for the value of the goods, or possibly to replace the goods.
While stock coverage falls within the realm of business contents insurance, it's usually sold as an extra coverage for an add-on premium—meaning, it is usually not covered as standard under your business contents insurance and you will pay extra for it.
Policy Limit/Sum Insured
When you take out a policy you'll need to estimate the value of your stock—that will form the basis for the coverage limit on your policy. The value to use is the maximum value of the cost of the stock to you on any given day, not reflecting any profits you hope to make.
How much cover do you need?
Use the cost of the stock to you; not including potential profits.
Some insurers offer extra coverage at seasonal times of the year to reflect fluctuations in stock levels that a business might have throughout the year. For example, a garden centre will hold more stock in the summer; a gift retailer will hold more stock ahead of Christmas. If your insurer doesn't offer cover for seasonal fluctuations (e.g., extra 30% coverage in November through January) then you will need to ensure your limits cover the maximum value of your stock at any point in the year.
Before you go online or call a broker or insurer to get a quote, you'll need a somewhat accurate estimate of the value of your stock.
Do I need stock insurance?
If you hold stock as part of your business, then you probably need stock insurance. Stock can include anything that is going to be sold to customers, even if not yet finished and ready for sale—stock cover can protect your raw materials, works in progress and finished goods. It can also cover stock that your customers have ordered and paid for, and you have yet to deliver (goods in trust). For example:
- Bakery: Flour, butter, nuts, chocolate, etc. as well as finished goods
- T-shirt distributor: T-shirts
- Cafe: Food and drink
- Retailer: All of the product they order in and resell
- Gardener: Bulbs, flowers and plants, soil, mulch, pots, etc.
- Furniture manufacturer: raw materials like wood and fabric, works in progress and finished goods
What Does Stock Insurance Cover?
Stock insurance covers loss, accidental damage or theft of a business's stock resulting from a wide array of risks. Some policies will cover "all risks" but most will list certain covered perils. While a policy will not cover all risks and there will be conditions, the following perils are commonly covered by stock insurance:
- Explosion (boiler or gas)
- Riot or strikers
- Storm or flood
- Escape of water from pipes or tanks
- Heating oil leakage
- Sprinkler leakage
- Theft or attempted theft
- Subsidence, ground heave or landslip
- Accidental damage
Business owner frequently seek out coverage features to address certain risks to their stock, as shown in the list below. If any of these features seem appropriate for your business needs, be sure to look for get a policy that includes them—although you may need to pay an extra premium for some.
What can be covered
- Cover while stock is at your place of business or off site (e.g., at an exhibition)
- Goods in transit
- Theft from a vehicle
- Frozen food cover
Common Exclusions and Limitations
As with all insurance policies, every stock insurance policy will be subject to a set of terms and conditions. While these will be unique to each policy and insurer, there are some common exclusions to be aware of when it comes to stock insurance.
For example, contents insurance policies typically exclude deterioration of a good due to a change in temperature or as a result of electrical or mechanical breakdown—in other words, frozen food wouldn't be covered. Here are a few common exclusions to know about:
- If your premises are not secured in the way specified by you when you took out the policy
- Frozen food is often not covered as standard (but you may be able to buy an extension if needed)
- There may be inner limits on wines, spirits and tobacco products (e.g., £1,000)
- Stock stored in a basement unless on a rack at least a minimum distance off the floor (e.g., 15 cm)
- Damage due to wear and tear, light, moths, vermin, insects, damp, deterioration
- Shortage or damage identified only whilst taking inventory
- Loss or damage from dishonesty or fraud by an employee or person lawfully on your premises
Factors that Affect Stock Insurance Costs
The cost of stock insurance depends primarily on the value of the stock and the perceived risks that something could happen to your stock. As a result, when you apply for a stock insurance quote you'll be asked a series of questions to help the insurer quantify the risk presented by your business.
You may be asked about the construction of your building, security, and local risks of natural disaster like flooding. For example, a building with a higher percentage of flat roof has a higher chance of flooding than a building with a pitched roof. Here are some of the many factors that affect the cost of a business's stock insurance:
- The value of your stock
- The type of stock you hold (e.g., t-shirts, jewellery, computers, etc.)
- The location of your business (e.g., in a warehouse, industrial unit, covered shopping centre, etc. as well as the post code)
- What your building is made of (e.g., brick, stone, or concrete vs. metal)
- What your roof is made of (e.g., tile, slate, metal or concrete)
- How much of your roof is a flat roof (e.g., 25%)
- If you have roller shutters protecting your front door
- If you have a professional installed and maintained intruder alarm
- History of flooding, subsidence, landslip, heave or dry rot
- The amount of cash you keep on the premises at night
- Your claims history
If an insurer considers your business to be riskier due to any of the above factors, you are likely to pay more for your stock insurance. Likewise, if your business presents a riskier profile then you might have less choice of insurers, as some will balk from offering you a quote.
After you Buy a Policy
After you've purchased a suitable policy, a business needs to stay on top of their stock situation for insurance purposes. If you break any of the conditions then your policy could be deemed invalid. For example, if your alarm malfunctions and weeks go by without you fixing it, your insurer is not likely to cover any claims of theft.
Or if your business grows and you start holding twice as much stock, your insurer might not reimburse you as you'd expect for a claim (e.g., if you under insure your contents by 50% then the insurer may only pay you 50% of your coverage limit in the event of a valid claim, leaving you well short). So after you've purchased your policy, be sure to stay on top of the following:
- If your business grows or changes, be sure to alert your insurer to any change in the value or type of your stock
- If your security or the storage of your stock changes, you'll also need to notify your insurer