What it means to be underinsured and how to avoid it happening to your business
The worst time to find out that your business is underinsured is when your claim is part paid, or you realise that your insurance doesn’t cover all your stock, goods or equipment. So, what does it mean to be underinsured and how can you avoid this for your business?
What is underinsurance?
Simply put, underinsurance means that your insurance doesn’t provide the level of cover your business really needs, especially in the case of a large loss or a disaster.
For example, if your commercial property burns down and the sum insured in your insurance policy is 70% of the value of demolishing, rebuilding and also refitting the inside of the building. Then you won’t have enough money from the insurer to rebuild, you may have to pay the balance of the rebuilding costs. Insurance is designed to help you manage financial risk, pay insured claims promptly and help you get your business back up and running.
Common causes of underinsurance for SME’s
Lack of correct insurance can be due to lots of reasons, the owner being time poor, insurance is seen to be expensive or not necessary, as the perceived risk is low. Some examples are:
Lack of insurance cover. 80% of SME’s don’t have insurance to cover loss of Business Income or Revenue, following a claim, with the majority closing for good without adequate cashflow. This type of insurance pays the ongoing fixed costs of the business, as well as staff and the owners’ wages, while the business cannot trade, or the building is being repaired.
Insufficient sum insured or lack of cover for specific items. This can result from under-estimating the value of specialist equipment or stock at peak periods. For example, if there is a $25,000 limit on portable equipment and the replacement value is $50,000 when making a claim, then the amount paid under the policy is less than the replacement cost.
Type of damage is not insured. This include flood and bushfire damage not being insured, as the risk was not considered, not properly understood or seen as too expensive. These events can be catastrophic and put the company out of business.
How to avoid being underinsured
There are two easy ways to help in minimising the possibility of being underinsured. The first is to speak to your insurance adviser because they understand your industry and can advise and assist you to review your insurance and risks, reducing the risk your business is underinsured.
The second is to regularly review your insurance cover, particularly when changes are made to your business. These can include renovations, machinery upgrades or expansions. Also keep in mind that costs increase over time, so whilst your estimates of sums insured or the types of cover might have been correct 5 years ago, you may not have the right cover today.
Do you have to pay or contribute to the loss if you are underinsured?
The answer is probably, yes because there are average replacement clauses in property policies for example. This means that if you are underinsured (less than 90% of the replacement value), you may be contributing to the rebuilding or replacement cost. If you don’t have the type of insurance you need, you may have to foot the entire bill.
This article originally appeared on Insurance Advisernet Website and has been published here with permission.