What happens if your business is underinsured and you make a claim? One result is that you only receive part of your claim and another is that you receive nothing. Imagine if you underestimated the replacement costs of stock or equipment that later catches fire and your insurance only pays $100,000 when the true replacement costs are $200,000? Would that make a difference to your cash flow?

As you can appreciate, underinsurance can seriously affect your business, but you might be surprised at how common this in is Australia. For example, in 2014, CommInsure estimated the value of underinsurance at $3.1 Trillion with approximately 70% of all small businesses having at most, 90% of the cover they actually need.

Why are small businesses underinsured?

There are a variety of reasons why small businesses are often underinsured, here are four that might ring a bell with your circumstances:

  1. Many small businesses don’t realise that they are underinsured, often because they are simply too busy to have really looked at their cover in any detail. This can easily happen when new assets are purchased and no-one thinks to review their insurance policies.
  2. Often, the person who initiated the policy made a mistake by significantly underestimating the costs involved in replacing assets or rebuilding structures.
  3. Replacement or rebuilding costs are always rising, so if you don’t regularly review your coverage, your payouts might be less than you anticipated. 
  4. Occasionally, a business will try to increase their cash flow by reducing their premiums, resulting in their business being underinsured. This strategy is akin to shooting yourself in the foot, because if you don’t have sufficient cover, you will need deep pockets when your claim isn’t paid or doesn’t wholly cover your costs.

Of course, the insurance world can be very complex and it can be difficult to know how much cover you actually need for your business. This is why you need to speak to an insurance specialist whose job is to minimise your risk, whilst maximising your cover.

3 Steps to avoid underinsurance

  1. Review your insurance cover: You need to regularly review the replacement value of your stock, equipment, machinery and buildings to make sure that your insurance policies cover these costs. If your policies are not up to date, your business is essentially taking on part of the risk, so it’s vital that as your business grows, your insurance policies match your needs.
  2. Business interruption cover: If your business can’t trade for 6 months because you are rebuilding following a devastating fire, how would you manage? Business interruption insurance covers the shortfall in gross profits when your business can’t trade due to an insured event. So if you have to rebuild following a fire, this insurance covers your ongoing costs and protects your profit margins until you can reopen your doors.
  3. Get the right insurance cover: When the livelihood of your family and your employees is at risk, it’s no time to prevaricate about the cost of premiums. You must make sure that your business has the right type of insurance cover and avoid being underinsured at all costs. This  means that you need to thoroughly assess your businesses risks and ask for specialist help if needed. 

There are plenty of small business owners who have gone out of business because of underinsurance, which is why speaking to an insurance specialist is simply good for business. 

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General Advice Warning

The information provided is to be regarded as general advice. Whilst we may have collected risk information, your personal objectives, needs or financial situations were not taken into account when preparing this information. We recommend that you consider the suitability of this general advice, in respect of your objectives, financial situation and needs before acting on it. You should obtain and consider the relevant product disclosure statement before making any decision to purchase this financial product.

Insurance Advisernet , July 02 2018

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