3 Things You Can Do to Avoid Underinsurance – A Quick Guide for Business Owners

Do you run a business? Are you confident that you have the right level of insurance to protect your business if the worst happens and you need to make a claim?

Statistics show that 50% of SMEs are underinsured, and many businesses are vulnerable if they suffer a loss.[1]

For many business owners, your business is your livelihood and, with the right insurance, you can make sure it is adequately protected beyond the compulsory insurance basics.

If you are underinsured you could be faced with unexpected costs in the event of a claim, as you are effectively taking on a percentage of the risk. This could impact your ability to recover from a loss because of the additional pressure unexpected costs put on your cash flow. With more than one-quarter of UK SMEs reporting that they would go out of business if faced with an unexpected bill of £50,000, underinsurance represents a risk to the existence of many small businesses. [1]

3 Things You Can Do to Avoid Underinsurance

If you are thinking ‘it won’t happen to me’ in the hope that you might save some money – think again! The money you save won’t be enough to cover the costs of an uninsured loss.

Here are three things you can do to help avoid these additional unexpected costs in your business.

1. Buy Enough Cover

This is one of the most common ways businesses are underinsured. We know that everyone is scrutinising their costs and expenses as we face the largest cost of living crisis seen in a generation, but it is a false economy to cut costs by insuring less than you need to as you are effectively taking on a percentage of the risk yourself but may have not put the capital aside to cover this.

Make sure you have a good record of everything in your business including equipment, subscriptions, software as well as your physical premises, contents, and accounts. But if you’re underinsured, your policy may not operate as intended, meaning higher costs for you and your business.

2. Review Your Cover

Growing businesses may expand in different ways. You may embark on different activities, buy new equipment, or move premises. A business insurance policy needs to grow with the business and changes can be made to your cover at any time during the policy period and you may have to pay any additional premium due.

In recent months we have seen an increase in the cost of building materials – some sources claiming these have increased as much as 20% – and the rebuild cost of the property you insure must reflect the accurate cost of rebuilding. If you have not had an up-to-date rebuild valuation done, this is worth considering.

If you are a business that has periods of increased activity around Christmas, Easter, or another key date in the year, your stock or equipment levels may need to be increased. It’s important to remember to tell your insurer. Some policies will have a seasonal uplift built-in, but it’s worth knowing what cover you have and if it will offer enough protection if the worst happens.

It might be that because of changing market conditions you are offering a new product or service and you need a type of insurance you have not had before. For example, if you take on your first employee or are planning in-person events you might need an Employer’s Liability insurance or Public Liability insurance policy.

Think about how technology and emerging risks might mean you need a new cover. Cyber Insurance is the perfect example. If you hold data, have an online shop, or are reliant on IT to run your business, it is worth exploring the cover that a Cyber policy can provide.

You could be underinsured (or even not insured at all) because you don’t buy a type of insurance that could protect your business. This could be due to a lack of awareness or information available to business owners. Common types of cover which are overlooked are Public Liability insurance, Product Liability insurance and Cyber insurance.

3. Understand the Average Condition

Mis-calculating the cost of a piece of equipment or underestimating the figures on which your insurance cover is based, and you then need to make a claim, is when you could find out you are underinsured, and the Average Condition could be applied to your insurance policy.

For example, if you insure your laptop for £500 but the cost to replace it is £1,000 there is a £500 shortfall. The premium you paid was based on £500 so this is the most that the insurer will usually pay out following a total loss and you will have to find £500 to cover the cost of a new laptop. Any partial loss will be reduced in the same proportion of the cost to replace the item; this is called Average.

To really understand this, below shows the average clause in practice:

source: https://www.allianz.co.uk/news-and-insight/insight-and-expertise/why-is-index-linking-so-important-to-customers.html

If you need to make changes to your policy, you must tell your insurer or broker as soon as possible.