Insurance – it’s something we all know we should have, but when is the last time you truly checked your coverage? For many small and medium-sized enterprises (SMEs) being underinsured is a surprisingly common issue.
Whether it’s property, liability, or business interruption insurance, having insufficient coverage can put your business at risk when the unexpected happens. Here’s a look at why SMEs need to be cautious about underinsurance and some solutions to help you stay protected.
What does be underinsured mean?
Being underinsured means your business has insurance, but the coverage doesn’t marry up with the actual value or risk involved. For example, you might have liability insurance but not enough to actually cover all potential claims or, property insurance that won’t cover the entire cost to replace damaged assets. This can lead to a significant financial problem that could threaten your business's stability.
Why are so many SMEs underinsured?
There are several reasons why SMEs are often underinsured:
Budget pressures: Many small businesses try to cut costs by opting for minimal coverage. But, in the long run, the cost of underinsurance can be far higher than the initial savings on premiums.
Rapid business growth: Small businesses can grow quickly, and this means they can outpace the cover provided by their original policies. New assets, new operations and new employees can change your insurance needs, yet your policy may fall behind.
Complexity of policies: Legal jargon, fine print, technical terms – all these components mean insurance can be confusing. Without a full understanding, you may select the wrong coverage.
Underestimations: At the time of taking out a policy, it’s easy to underestimate the replacement value of assets or the scope of potential liabilities, leaving your business with inadequate protection.
The risks of underinsurance
The main risk of underinsurance is business interruption - or worse, closure! If your business faces a major setback, like a fire, theft, or liability claim, and the insurance coverage falls short, it can be a financial disaster. Having inadequate coverage can lead to large out-of-pocket costs, forcing business owners to dip into other funds, take on debt, or shut down entirely.
Additionally, many SME owners don’t realise that underinsurance can impact the way claims are handled. Insurers may apply penalties, often known as “average clauses”, which reduce the claim payout based on the level of underinsurance. For example, if you’ve insured your property for half its value, the insurer might only pay 50% of any claim.
How you can make sure you’re properly insured
Here are some practical steps you can take to ensure your business is properly insured:
Review your policies annually: Make it a yearly habit to check all your policies. For fast-growing businesses, a semi-annual review could be even better. Ensure all assets are valued correctly and update your coverage accordingly.
Ask an insurance broker: An experienced insurance broker can assess your needs and help you get the right coverage for your industry.
Consider business interruption insurance: This coverage helps protect your business against revenue loss during downtime due to unforeseen events. This can be a lifesaver for businesses that reply on constant operations.
Evaluate liability and professional indemnity needs: As businesses grown, their liability grows too. Regularly assess whether your public liability, professional indemnity, and other coverages are sufficient to cover today’s risks.
Document all assets and operations: Keeping an up-to-date inventory of all assets means your policy is accurate, making it easier to prove losses in a claim.
Investing in good insurance today will help you succeed with your business's tomorrow.
Are you fully covered? Speak to one our trusted insurance advisors today and find out.
Jace joined the firm in 2005 and has over 20 years' experience in the taxation and business services field. By immersing himself within the industry, he has developed a deep understanding of the financial and operational issues that face businesses and, as a result, provides tailored solutions to bring the best possible outcome to his clients.
Jace takes a holistic approach, allowing him to plan for all aspects of his clients personal finances including their practice / business, investments and superannuation.
