Business owners that don’t properly insure their business face a number of risks both financially and legally.
Business underinsurance is a growing problem, with Aviva reporting that 42% of SMEs that insure buildings with them are underinsured. Unfortunately, the unexpected can happen and you may need to make a claim. If you do, the last thing you want to hear is that the level of insurance cover you have won’t cover your costs and worse still it risks your overall business.
But what are the risks to your business if you are underinsured?
Business underinsurance risks
1. Financial loss
This could include loss of revenue, cash flow problems, or having to pay for a proportion of the repairs to your building or the replacement of contents yourself. Often businesses simply can’t afford to suffer these levels of financial loss whether they be short term or longer term.
2. Legal action
Every business faces the risk of legal action from customers, employees or third parties. Compensation claims or settlements can financially hurt a company’s profits, ruin their reputation or worse put the company out of business.
3. Non-compliance / loss of contracts
Many companies or local authorities will insist on particular levels of insurance cover for suppliers working on their contracts. If you don’t have adequate cover, you could risk not being able to get these types of contracts or suffer from penalties, fines or legal action further down the line.
4. Reputational damage
Things like cyber-attacks and data breeches have seen even the biggest businesses and brands suffer from reputational damage. SMEs can face the same risks or risks of customer or employee complaints and bad PR should your insurance policy not adequately cover you for any action taken against you.
Top underinsurance areas
Rental property
Landlords are especially at risk of underinsurance, with up to 40% of rental properties being underinsured and privately rented homes in Britain being underinsured by an astronomical £315 billion. Whether its improvements made to rental property, using only market value, not accounting for loss of rent or allowing automatic renewals without assessing changes, all of these things often lead to underinsurance.
Commercial property
Your commercial property is often your highest value asset and yet many property owners undervalue the cost of rebuilding and then underinsure their commercial property. Around two thirds of commercial properties are underinsured and are normally covered for just two thirds of their correct rebuild cost.
Business interruption insurance
Business interruption insurance is designed to cover loss of income and help businesses recover from unexpected events that disrupt their operations. Whilst business continuity planning may help should the worst happen, taking out business interruption insurance can also help. However, when a business is underinsured, this coverage may not be sufficient to cover all the losses incurred during the interruption period.
When taking out business interruption insurance, you must remember to include all revenue sources. Consider how trading has been and will be for the next 12-18 months and ensure you allow for growth within the declared revenue figure to help you avoid underinsurance.
You must also consider the period for which you wish to insure (known as the Indemnity Period). Insuring your financial health for just 12 months may not be long enough. You need to consider the knock-on effects to the business of a long interruption to trading. An inadequate indemnity period may cause insurance payments to stop before a business fully recovers after a loss. For example, worldwide supply chain disruption happening for longer periods of time may require business interruption cover to be longer than in past years.
Summary
In recent years underinsurance remains a huge problem for both businesses and landlords as both commercial property and residential property prices rise, supply chains are disrupted and more adverse weather is experienced.
For more help and advice on underinsurance read our ‘Underinsurance Explained’ guide or contact us today via our website, email or call us on 0116 260 0506.
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