- Inflation has put small businesses at risk of insurance coverage gaps, warns SME insurance expert Jane Mason from BizCover.
- Losses due to significant events may result in insurance claims that don’t cover the total cost of replacement due to the rising cost of materials.
- Small business owners can reduce coverage gaps by regularly assessing their risks and ensuring they have sufficient insurance coverage for the current value of their assets
Small businesses may be at risk of insurance coverage gaps due to inflation, says SME insurance expert Jane Mason, who urges business owners to review their policies before it’s too late.
Losses due to storm, fire, and other significant events could result in insurance claim payouts that don’t cover the total cost of replacement due to the difference between what the business has insured and the cost to rebuild.
“What was the right cover one year may not be enough cover now because of the rising cost of materials,” says Mason, Head of Product, Channels, and Risk at SME insurance service BizCover.
While inflation has likely peaked in Australia, the remnants of double-digit increases in input construction costs could still leave small business owners with significant holes in their business insurance.
The price of steel (42.1%), timber, board and joinery (20.6%) and glass (14.1%) experienced major inflationary pressures peaking mid-last year.
Overall, the price of building construction rose close to 12% over the year to December.
This means that if you insured your building in December 2021, the cost to replace that building may have increased by 12% in one year.
“The affect inflation has on replacement costs cannot be overstated. Aussie businesses could be left with a serious financial crisis by not having enough coverage to cover your loss.”
How does your business insurance coverage work?
Business insurance can be confusing, but it’s important for small business owners to understand what they’re getting when they buy insurance.
When you buy business insurance to cover your commercial building or your contents and stock, you’re entering into an agreement with the insurer.
The insurer will typically pay to repair, rebuild, or replace the damaged property to the state it was in when insured. Some insurers may offer to cover 120% of the total insured amount to account for changes in replacement costs.
For example, if you insured your business for $1 million last year and a fire destroyed it, but the cost to rebuild has gone up to $1.2 million since then, the insurer would typically pay for the additional $200,000 if they offer 120% coverage. But if they only cover up to the insured amount ($1 million), you may have to pay the remaining $200,000 out of pocket.
“It’s critical for small business owners to know how much they’re covered for because events like these can be very expensive,” says Mason
“Even if your building is totally destroyed and needs to be rebuilt, if the cost to replace it has gone up due to inflation, there may be a gap between what’s covered and what you’ll need to pay.”
How can small business owners reduce gaps in their coverage?
While inflation continues to linger, small business owners can take some steps to avoid being underinsured.
Mason says regularly assessing their exposure to risks and ensuring they have sufficient insurance coverage for the current value of their assets can significantly reduce coverage gaps.
“It’s important to insure your business for an amount that is sufficient to cover not only the tangible assets, but the cost of repairs and any other variables that might leave you out of pocket,” she says.
While reviewing your cover at renewal is a great time to consider your options, Mason says you could check in at any point throughout the year to ensure you have enough cover.
“Consider jumping online to compare quotes so you could then decide whether the price of the cover justifies the protection.”
