In the current economic climate, underinsurance has become a growing problem for small businesses across the UK. With financial pressures mounting, many business owners are tempted to cut corners when it comes to insurance. But underinsuring can be a false economy—one that could have devastating consequences when a claim arises.
What is Underinsurance?
Underinsurance occurs when a business doesn’t have enough cover to fully protect itself in the event of a disaster. Whether it’s for the buildings, business machinery, stock or liability insurance, businesses that are underinsured risk facing significant out-of-pocket expenses should the worst happen.
In fact, according to a study by the British Insurance Brokers’ Association (BIBA), around 40% of UK small businesses are underinsured, leaving them vulnerable to financial ruin.
Buildings and Contents Insurance: A Potential Minefield
For businesses and landlords that own their premises, buildings insurance is critical. However, many owners underestimate the cost of rebuilding or repairing their property, especially with inflation pushing up construction prices. It’s not just about the property’s market value, but what it would cost to completely rebuild in today’s terms – taking into account the costs of debris removal and professional fees.
Then there’s contents insurance, which covers business machinery/equipment and stock. Too often, businesses undervalue their assets, leaving themselves exposed when they need to replace items. In most cases they should be insured for the total replacement cost as new not the second hand value. A fire, flood, or theft could leave your business with insufficient funds to replace essential tools and equipment.
Estimating Liability Insurance: Don’t Guess!
Small businesses also need adequate liability insurance, which covers legal costs and compensation if someone sues your business. Whether it’s public liability for injuries on your premises or employer’s liability for staff accidents, underestimating this cover can lead to huge financial losses. Compensation claims can easily spiral into six-figure sums, so this is not an area to take lightly. You need to ensure that both the chosen limits of indemnity and your financial estimates are adequate. This includes annual turnover, wages or maximum staff numbers.
Financial Hardship Temptation: Why Cutting Corners is a Bad Idea
With the cost of doing business on the rise, it’s easy to understand why some owners might be tempted to scale back on insurance premiums. However, underinsuring is a dangerous gamble. If a business needs to claim and the insurance doesn’t fully cover the loss, it can lead to crippling debts or even closure.
Insurers also apply an ‘Average’ clause sometimes referred to as proportional settlement. This means that if you’re underinsured by, say, 50%, they will only pay out half of your claim, even if it’s within your cover limits. So, that cut-rate insurance policy could leave you footing a large bill when you can least afford it.
How to Avoid Underinsurance
To safeguard your business, regular reviews of your insurance policies are essential. You need to ensure that valuations for buildings, contents, and liability coverage reflect current prices and risks. Consulting with a professional insurance broker will ensure you’re not leaving your business vulnerable.
In conclusion, while financial hardship is a reality for many small businesses, cutting back on insurance is not the solution. The risks far outweigh any short-term savings, and in the event of a disaster, being adequately insured can be the difference between survival and bankruptcy.
Don’t let underinsurance be the downfall of your business—protect your assets and future by insuring wisely.
At Munro-Greenhalgh Ltd we will work closely with you to understand the individual needs of your business to ensure we offer the the correct policy cover at the best terms available.
For any help or assistance please contact the office.
