Dangerous underinsurance: is your business running the risk of not having enough insurance?

 

If you’re a business owner or decision-maker, using an insurance broker to regularly review all of your business insurance policies to see where you might be at most risk could be highly beneficial for your business.

There are various types of insurance available to protect businesses in case of an adverse event, from building and contents insurance to business interruption and liability insurance. Failing to take out adequate insurance could lead to increased risk and, potentially, financial losses for some businesses.

Small to medium sized enterprises (SMEs) tend to have the highest rates of underinsurance but no business is immune. Recent research showed that while business risk and equipment breakdown were the most prevalent insurable concerns of SMEs, about 80 per cent of the survey respondents didn’t have insurance cover to address those concerns.[1]

What is underinsurance?

There are three key ways that your business can be underinsured:

  1. Events not covered. The insurance policy may not include cover for events that are likely to happen. For example, in Brisbane many insurance policies won’t cover you for damage due to floodwaters.
  2. Insufficient value or sum insured. The submitted value of your property may be significantly lower than the replacement value. This can be due to renovations or improvements that happened after the initial policy was taken out, or it can be a deliberate ploy to reduce the premiums, whereby the business undervalues its property to avoid paying higher premiums.
  3. Insufficient policies. You may have adequate insurance for the replacement of your commercial property but you may not have considered business interruption insurance or liability insurance. This means you could still be out of pocket because the business can’t operate as normal while the property is being repaired or replaced. If a liability claim is made and the insured amount is too low, or you don’t have any liability insurance, then the business could face significant losses if the claim against you is successful.

How does it happen?

Many companies become complacent because they don’t get professional advice. Instead, they choose policies online, pay their insurance premiums, and assume they’re covered. Too often, they don’t find out until it’s too late that their insurance policy doesn’t cover them for the event they’ve just experienced, or their insured amount is far less than what they actually need to get the business back on its feet. Underinsurance can be more concerning than having no insurance because your expectations will not be met.

What should I do now?

Take the opportunity to review your policies with a trusted advisor to make sure you’re adequately covered for the events that could happen, and to ensure you’ve considered all aspects of a disaster. This includes not just damage to or loss of property but business interruption and other potential liabilities.

 

[1] http://www.vero.com.au/vero/sites/default/files/fm/pdf/sme-insurance-index-report-2016.pdf