As many as ⅔ of Australian businesses are estimated to be underinsured, according to a Business Australia report, and ¼ of small to medium businesses may have no form of general insurance at all, the Insurance Council of Australia has found. Here we take a look at some of the most common areas where business insurance coverage falls short, and what you can do about it.

Shortfalls in insurance cover tend to fall into one of three areas

  • failing to recognise all of the relevant risks for your business
  • not accounting for increased costs or all of the costs involved in damages or liabilities that occur
  • being unaware of restrictive terms or exclusions in your cover.

These shortfalls may mean that a business is lacking adequate cover in a number of critical areas, even if owners may think they are insured.

The 5 most common business underinsurance pitfalls

These are the 5 most common business underinsurance pitfalls as indicated by claims, according to industry sources

  1. business interruption
  2. property coverage
  3. injury or damage to others or their property
  4. faulty workmanship/product
  5. sums insured for business assets.

More thorough consideration of these 5 areas to avoid underinsurance can make a big difference to the protections that a business may need. Here are some of the factors to bear in mind to effectively protect your bottom line.

Business interruption cover can save your business — as long as you get it right

If circumstances such as a fire or another factor outside your control force you to suspend trading you will still need to continue paying business overheads, including your workers' wages. Having business interruption insurance can tide you through but you need to calculate it adequately.

That means having an adequate indemnity period (allow for a worst case scenario of total replacement from the ground up) and including increased costs of working in the interim, such as renting alternative premises and equipment.

Underestimating the value of property and assets

Business owners may underestimate replacement sums by failing to update the costs involved due to factors such as inflation, or additional costs such as architects' or engineers' fees, removal of debris (especially if asbestos is included) or meeting updated regulatory or preservation requirements.
They may also overlook external assets such as carparks or outbuildings, or internal ones such as office fittings and contents, or simply forget to keep the value of replacing plant and equipment current, relying instead on what they paid for what might be outdated items.

Liability for injury or damage to others or their property

You have a duty of care to protect your customers from harm, whatever the size and nature of your business. Some of the most commonly occurring claims are when someone injures themselves while on a business premises or involved in that business. If an accident occurs on your premises or an injury results from your operating equipment or vehicles, your business can be held liable and the injured party may bring a legal claim for damages.

These types of cases can be very expensive so it's essential to have public liability cover if your business is open to any kind of interaction with non-employees. This includes areas of high foot traffic or where personal belongings are stored, such as gyms and fitness centres.

Faulty workmanship or products giving rise to client or customer dissatisfaction

If your work falls short of expectations or a component you've used fails, the client or customer may claim for compensation, involving you in legal expenses, even if you're not at fault. Having professional liability cover is critical if you provide services of any kind, from personal training to professional advice. Similarly product liability insurance protects you if your business provides a product that proves to be faulty, giving rise to a legal claim.

Inadequate insurance values can leave the business to bridge large financial gaps

It's crucial to regularly review your business insurance cover against changes that you've made to operations or equipment purchased in order to avoid your insurance cover falling short if the unexpected does occur.

If your business is expanding it's likely that your risk exposures and liabilities are too. You may have invested in plant or machinery, increased your stock, moved some functions to different premises or altered the way you conduct business in some other way. And if you're running a small business out of your home, home and contents insurance policies don't pick up your business cover.

If you overlook some aspect of your operations or allow the replacement value of existing assets to become outdated and inadequate it could put huge financial pressure on your business if your insurance falls short or doesn't cover a particular exposure.

Steps to avoiding business underinsurance

Insurance renewal time is a good opportunity to make the time to check that your business cover is providing the scope of cover that you need. Business changes — both growth opportunities and risks that create different exposures — are also important prompts to reflect on adequacy of insurance.

Practical steps to review gaps in insurance cover include

  • reviewing your insurance cover and sums insured annually, keeping a worst case scenario in mind
  • conducting a walk-through of your business premises to create aninventory of your assets and keep payment records to assist with establishing accurate values if you do need to make a claim
  • running through property replacement calculations, ideally with your insurance broker, to sanity check your updated figures. Bear in mind that the real estate value of your property is not the same as the cost of rebuilding
  • checking exactly what your policy covers — and doesn't cover — and raise questions with your broker before you commit to taking out or renewing insurance.

Also ensure that you understand the terms of the policy, such as whether it's on a total replacement or sums insured basis and whether you are covered for accidental damage generally or specified types of losses only, and if there are any exclusions you need to be aware of.

How your broker can help

If you think your business may be underinsured or aren't sure you have all the cover you need, talking to an insurance broker can help you accurately assess all your exposures.

Whether they simply go through your policy with you, asking the critical questions, or arrange for a third party valuation, your insurance broker has an insider's approach to how best to protect your business.

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Disclaimer

Gallagher provides insurance, risk management and benefits consulting services for clients in response to both known and unknown risk exposures. When providing analysis and recommendations regarding potential insurance coverage, potential claims and/or operational strategy in response to national emergencies (including health crises), we do so from an insurance and/or risk management perspective, and offer broad information about risk mitigation, loss control strategy and potential claim exposures. We have prepared this commentary and other news alerts for general information purposes only and the material is not intended to be, nor should it be interpreted as, legal or client-specific risk management advice. General insurance descriptions contained herein do not include complete insurance policy definitions, terms and/or conditions, and should not be relied on for coverage interpretation. The information may not include current governmental or insurance developments, is provided without knowledge of the individual recipient's industry or specific business or coverage circumstances, and in no way reflects or promises to provide insurance coverage outcomes that only insurance carriers' control.

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