The Dangers of being Underinsured

Many businesses, regardless of industry, are risking their own survival by unwittingly remaining underinsured. The problem is widespread and persistent; a disastrous event can strike at any moment, leaving businesses vulnerable to complete destruction.

Many small- and medium-sized businesses in the UK are underinsured due to a lack of business interruption insurance or because they did not know whether this type of cover was included in their business insurance policy.

You may only find out that your business is underinsured when you experience a major loss event, such as a data breach, flood or fire, and need to make a claim. Be proactive and know your status now so you can fix that gap and be prepared for anything.

What Does It Mean to Be Underinsured?

If your business is underinsured, it means that you possess policies, but your assets are valued and insured at less than their true value, leaving your business inadequately protected. Therefore, in the event of a disaster, you would be compensated for less than the true value. A shortfall in your insurance pay out could ruin your business.  

Businesses can be underinsured for many reasons. Often it is because business owners think that a major loss event will never happen to them, so they do not need comprehensive protection. But inclement weather, a cyber-security hack or a destructive fire can impact and destroy any business.

Business owners may fail to review their cover and leave sums insured and estimates untouched for years, despite major changes at their organisation such as additional employees, new equipment or recent construction. And because buildings and content are typically insured for their reinstatement value (how much it costs to rebuild), neglecting to habitually update your sum insured could mean you are only insured for the initial market value (the price of the property when you bought it). Thus, you would only be partially covered by your policy for rebuilding costs in the event of a partial or total loss.

Sometimes business owners choose to underestimate building costs and remain underinsured simply because they want to save money on their insurance premiums. But the short-term savings can never compensate for the out-of-pocket payments required to complement your insurance pay out in the event of an insured disaster.

Which Policies Are Most Often Underinsured?

Any commercial policy can be underinsured, but insurers report that the following are the most underinsured policies:

  • Buildings – Business owners often only consider the market value of a building and ignore the actual cost of rebuilding. Failing to regularly reassess the value of your property and adjust your policy accordingly could lead to your business being underinsured and consequently unprepared for even the smallest losses.
  • Machinery and plant – A frequently updated list of all machinery and plant is the best way to ensure it will all be covered when making a claim. Reflect any changes in your machinery and plant by adjusting your sum insured.
  • Business interruption – The inability to maintain business operations in the wake of a crisis can bedevastating. Possessing a current continuity plan and the insurance payout to cover it are essential.
  • Cyber-liability – Data breaches are an increasing threat to businesses of any size. Improving your cyber-security and developing an action plan are now necessary business practises to offset the potentially huge losses of a data breach.

How Can I Avoid Being Underinsured?

You can prevent your business from being underinsured by completing the following:

  • Provide the cost of rebuilding the property (including the costs of demolition, materials, and professional fees) to your insurer rather than the market value or the amount you purchased it for.
  • Calculate and use your actual total revenue.
  • Determine an appropriate indemnity period that allows your business enough time to recover.
  • Review your policy wording to ensure you have the biggest cover possible.
  • Increase your sum insured to reflect inflation.

Complete Your Cover

Contact the Exe Insurance team for more information on protecting your business with comprehensive cover. Call 01392 797 733 or email us on sales@exe-insurance.co.uk.

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