Is Your Business Underinsured? What to Check Before It’s Too Late
Even if your business is insured, you still may be at risk for some level of financial loss. That’s because many companies are underinsured. Frequently, owners don’t realize this oversight until after an accident or incident occurs and a claim is made. At that point, owners may face higher-than-expected costs when trying to bounce back.
The best way to protect your business from this kind of surprise is to consider carefully whether you have the right amount of coverage for your unique situation.
What does “underinsured” mean?
Underinsured doesn’t mean your business is without insurance, or uninsured.
Instead, it means your business may not have enough coverage to replace real estate, vehicles, inventory or other property lost to theft, fire, flood1 or other disasters.
Underinsurance can happen in a couple of ways, each with serious potential consequences. One common scenario occurs when a business purchases a plan with low coverage, high deductibles — or both — to save money on premiums.
This may seem like a wise move in the short run, but in the event of a loss, this strategy can end up costing the business more than what adequate coverage would protect.
Another common issue is not expanding coverage to match your company’s growth. Some owners and leaders start off with appropriate levels of coverage and deductibles but don’t update their coverage as their businesses grow.
For instance, commercial property2 coverage that was adequate for one small warehouse and its inventory might not be enough to cover a new, larger warehouse that holds twice as much product. That creates a potential coverage gap if a claim is filed later.
What can happen if your business is underinsured?
The consequences of underinsurance can be severe. For example, consider a small family business that suffers storm damage from the outer bands of a strong hurricane that hits the coast. The business needs to rebuild quickly to minimize interruptions, maintain revenue, and avoid losing customers to competitors that were not impacted by the storm.
Unfortunately, this imaginary business is underinsured, and the business policy they have in place will only cover about 60% of the cost to rebuild. The owners — a couple that inherited the business from a family member — might feel pressure to cover the rest of the costs.
Alas, their own home sustained storm damage, leaving them with additional out-of-pocket expenses for repairs. In such a situation, the owners may have to choose between taking out a personal loan to cover uninsured business losses or closing the business — just when they need more cash and fewer expenses.
Again, this is an imaginary situation. But it's not too far-fetched. In fact, the nonprofit, Insurance Information Institute (III), notes that 40% of businesses never reopen3 after a disaster. Among those that do, another 25% fail within a year.
Having the right business insurance can help your company survive the unexpected and protect your livelihood as well as that of your employees. Commercial insurance can also serve as a financial firewall between your personal and professional financial obligations so that problems with your business don’t upend your personal finances.
5 common signs that your business may be underinsured
How can you know if your business needs additional coverage? Here are five quick questions to ask yourself and, for larger companies, your leadership team:
1. Has it been more than a year since you reviewed your business (also referred to as commercial) insurance policies?
2. Has your revenue, employee headcount or physical space changed significantly since your last insurance policy review?
3. Are you still carrying the same coverage as when you started your business?
4. Has the value of your business assets or the inflation rate increased since your last insurance policy review?
5. Are you unsure of which policies your business carries and what they cover?
If you answered “yes” to any of these questions, then reviewing your business coverage should be a top priority.
What to review in your current business insurance policies
As you gather your policy documents and re-read them, look to understand your:
• Coverage limits and exclusions
What’s the maximum amount the policy will pay, and are there situations that aren’t covered? For example, flood damage is often excluded from standard property insurance policies.
• Deductible amounts
How much will your business have to pay out of pocket in the event of a covered loss? Is that amount affordable for your company now?
• Coverage type
In other words, does your policy cover replacement cost or actual cash value? In markets with high construction costs and inflation, a cash value policy may not be sufficient to cover the rebuilding costs.
• Potential cost savings through bundles
Purchasing more than one policy through the same insurer may give your business a discount on premiums. (Curious to learn more about this type of coverage solution? Ask RBFCU Insurance Agency about a business owners policy (BOP) by calling 1-888-564-2999 during regular business hours or emailing us now.)
How to right-size your business or commercial coverage
Because businesses grow and market conditions change, commercial or business coverage isn’t a “one-and-done” task. To avoid becoming underinsured, it’s smart to review your coverage at least once a year with the help of an experienced, licensed insurance agent who specializes in business and commercial insurance solutions.
Together, you can evaluate current risks and assess changes as well as adjust your coverage to reflect changing needs.
Already have what you believe to be adequate coverage? It’s also a smart practice to get a second opinion on your policy and premium options from time to time, especially if you’d like to save money by bundling.
The takeaway
Being underinsured can put your business and even your personal finances at risk. Proactively reviewing and updating your business coverage with the help of a trusted insurance agency can reduce that risk and potentially save your company money.
RBFCU Insurance Agency is here to help business owners and leaders get the right business and commercial insurance coverage at the right price. Call or request a quote online today.
