Is your small business among the one in four that say they’ll go under if faced with a liability claim? That’s the alarming statistic from one insurer’s survey. 

More respondents said they would:

• Lose clients

• Expect less revenue

• Have cash flow woes.

At the crux is understanding the cost of and whether you would be able to fund the costs of legal action due to injury or loss of damage to third parties arising from your business operations. If not, it’s time to look into insurance.

What does underinsurance mean to business?

Small businesses may find themselves in a tight spot when it comes to ensuring coverage for an event (fire, flood etc) that causes damage or business interruption to the business.

Having inadequate cover to protect your operations could put you out of business. Underinsurance, or having the incorrect cover, relies on you having funds to address shortfalls in the event of an adverse event or claim. If you don’t have the cash flow, capital or retained profits to do so, that could seriously interrupt your operations.

A key example

It’s vital to know the difference between the ‘insured amount or limit of liability’ and ‘total declared value’ of an insured asset. 

For instance, you may have insured your building premises for $1.5M, but need $2M to replace it totally. Insurers understand construction prices can vary, so add a 15%-to-20% margin to your policy. Even with that, you’re only insured for up to $1.7M. Insurers won’t look at that figure, but they will see you’re insured for a percentage of your property’s value.

Why people commonly underinsure

It’s easy to underestimate the costs to fix, rebuild, or replace your contents or property, including:

• Guessing their value 

• Using an old cost-per-square-metre figure for your building replacement cost

• Forgetting to factor in renovations and upgrades

• Higher building materials and labour costs

• More stringent building codes, such as for rebuilding on challenging sites

• Extra fees, including for removing asbestos, demolition, experts, etc

• Temporary accommodation costs, if needed

• Neglecting to list garages, sheds, car parks or other structures on your policy.

Another issue is that some business owners don’t think the worst-case scenario could happen to them. Tap into your network to ask other operators about their experiences with underinsurance and how they dealt with it.

Steps to avoid underinsurance

Using a quantity surveyor is a good start, but the key is conducting regular reviews of your coverage. This can help us point out any underinsurance risks. Policy fine print can change over time, meaning gaps in your coverage could emerge. Be clear on the distinction between accidental damage and defined events, too.

You may have changed your business operations, services/products, assets or premises, so need to reflect that in your coverage. Here are other reasons that would typically trigger a tweak:

• Stock levels differ from those on your policy lists

• Recruited more staff or let some go

• Significant changes to your turnover (either positive or negative)

• Created new business entities

• Changed directors or ownership structures

• New risks, such as cybersecurity, due to working in different environments (staff working remotely, for example).

Identify risks to your business and actively work to minimise their effects on your operations. Developing a robust business continuity plan will give you insights into how risks could affect your business and what to do to overcome interruptions.

Consider your business insurance policy package as something that adapts and grows with your business. We can help ensure you’re taking a comprehensive approach. Speak to us to ensure your assets are fully covered.