Understanding underinsurance: Keeping your business protected

As a small business owner, you probably understand the importance of being insured. You’ve assessed your risks and bought insurance to help protect your business—good on ya! But are you sure you have enough cover?

Underinsurance in Australia is a problem for many small businesses. One survey by insurance company Vero found that up to 57% of Aussie small and medium businesses might be underinsured1. That could prove costly come claim time.

We’ve created a quick and easy guide to help you understand underinsurance, its causes, and tips to determine if your business is underinsured.

A business person under umbrella - insurance protection

What is underinsurance?

Underinsurance occurs when you don’t have adequate insurance cover in place. In the event of a claim, your insurer will only cover you for sums up to the policy limit. This means your business will have to pay for any additional (uninsured) costs beyond the amount that your policy covers.

Underinsurance can have significant consequences for a business. A major loss that exceeds the sum insured could easily disrupt cash flow, drain your savings, lead to bankruptcy, or cause you to permanently close your business.

Why are some businesses underinsured?

There are many reasons why a small business may be underinsured. From forgetting to update your policies to underestimating the cost of rebuilding, let’s explore some of the more common reasons why underinsurance happens.

Renewing insurance policies on “autopilot”

It’s easy enough to ‘set it and forget it’ when it comes to your insurance policy. You’re busy running your business, so reviewing the insurance you already have in place may not be a top priority. Unfortunately, this often leaves businesses underinsured.

Renewal time is the perfect opportunity to review and assess your level of cover. Giving your policy a health check gives you an opportunity to consider whether the cover still fits your needs, especially if your business has experienced big changes in the previous year.

Not updating your original policy

Do you have the same insurance policy that you bought when you started your business? It may no longer meet your cover needs. Changes to your business and how you operate could mean that you’re underinsured.

As your business grows and changes, your insurance should grow and change to match. Events that may prompt a change in your business insurance include:

  • Offering new services
  • Moving to bigger premises
  • Hiring more staff
  • Increased turnover and revenue
  • Trading online
  • Investing in new equipment

Underestimating the cost of rebuilding

Construction costs change over time. While they often creep up gradually, many factors (like high inflation or supply chain disruptions) can make the price of building materials and services increase quickly. This can cause your business to be underinsured if you need to repair, renovate or rebuild your business premises.

A fire, storm damage or other insured event could force you to rebuild where you do business. The last thing you want is to be cut short when it comes to claim time by not having adequate cover in place. By reviewing your policy and taking into account current building costs, you can choose cover limits that will help you rebuild without paying from your own pocket.

If you own your business premises, structures like sheds, decking or outbuildings that make up your business property can be insured under your Building insurance policy. This is sometimes overlooked by small business owners and can result in underinsurance.

Forgetting about your business contents

Your business is more than just the building where you operate. Many other items may be required to run things smoothly, from tools, equipment and computers to furniture, records and retail stock. Your business may be underinsured if you don’t have adequate cover in place to replace its contents.

Determining the cost of replacing a business’ contents can be tricky, especially if you’ve collected things over the years. However, you can get things on track and figure out the right level of cover for your business.

An easy way to store evidence of your contents is to keep a copy of your receipts and proof of purchases. These can be scanned and stored in a secure cloud program, keeping them safe from fire, flood or storm damage. If you no longer have receipts, consider taking photographs of your stock and contents.

Having evidence of your purchased contents may be necessary when you have to make a claim. However, it also provides an indication of the value of your items, which can be used to review your level of cover.

Choosing policies with the lowest premiums

Another cause of underinsurance in Australia is when business owners deliberately select a level of cover that is less than the known value of their building or business contents just to save a few dollars on their policy premium. This could leave you significantly out of pocket if you were to suffer a large loss and make a claim.

Making each dollar stretch is important for many small businesses. However, underinsuring your business could cost you more in the long run. Instead of simply choosing policies with the lowest premiums, take time to carefully review the policy wording, terms, and cover limits to ensure you’re choosing cover that is right for your business and not just right for your wallet.

Covering your small business with BizCover

Being underinsured can create a significant financial risk of unplanned costs, potentially sending you out of business. Investing time into understanding the true value of your business’ building and contents, doing the calculations and keeping a record of purchases are worth the effort.

BizCover can help you find competitively priced Building and Contents cover for your small business.

We understand the insurance needs of the Australian small business community. Getting your business insurance sorted should be drama-free, and we’ve set out to help you do just that! From gift shops and cafes to tradies and hairdressers, we offer a range of tailored solutions to help keep your business from being underinsured.

Jump online or give us a call today to receive multiple quotes from selected leading Australian insurers and get covered in minutes.

1. Vero, Discover SMEs’ top risk concerns, and are they protected? 24 May 2022
This information is general only and does not take into account your objectives, financial situation or needs. It should not be relied upon as advice. As with any insurance, cover will be subject to the terms, conditions and exclusions contained in the policy wording.
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