The Real Risks of Underinsurance for Small Businesses

A recent study by The Australia Institute found that one in five Australian homes are uninsured or underinsured. This is equal to approximately 1.4 million homes at risk.

This is worrying news and could also reflect a similar trend with small businesses in Australia. Business insurance may be mandatory depending on the industry, regulatory bodies, and state or territory laws. However, many small businesses only take out the minimum required coverage, sometimes choosing not to protect against risks beyond those obligations. As a result, some businesses may find themselves underinsured and vulnerable when unexpected events occur.

What is underinsurance?

Put simply, underinsurance occurs when an insurance policy does not cover the full value of potential liabilities or the cost of replacing your assets. If a business owns stock that is valued at $250,000, but only purchases insurance that covers $100,000 worth of stock, then that business is underinsured.

Some business owners may be tempted to lower their premiums in order to save money. However, this could cost more money in the long run. Especially if an underinsurance clause is triggered.

What is an underinsurance clause?

An underinsurance clause is part of an insurance policy that takes effect if the insured amount is less than the amount needed to fully cover a loss.

What this means is that if something is insured for less than its full value (such as a commercial premises, stock, or machinery used in daily operations) then the underinsurance clause is actioned, meaning that the insurance company may only pay a portion of the claim. The underinsurance claim is triggered even if the damage or loss is within the cover limit.

The real-world risks of underinsurance

Take this claims story as an underinsurance example.

In April 2023, a serious storm caused significant damage to a record store. The damage to the property resulted in water leaking into the building.

When the record store owner inspected the damage after the storm, they found that the leakage had caused significant water damage to the insured contents and stock. The owner estimated that roughly $19,000 worth of their contents were damaged. As the contents were insured, the record store owner filed a claim against their policy, which provided contents coverage for a total amount of $260,000.

After the claim was made, the insurer assigned a loss adjustor to determine the extent of the damage and the value of the contents and stock within the premises.

Upon inspection, the total damage amounted to $15,176. However, the total value of the premises’ contents and stock added up to around $400,000 – a much higher figure than the coverage amount of $260,000.

As the damage was unequivocally caused by an insured event (in this case, a storm), the insurer agreed to pay out the claim. However, the underinsurance clause in the policy was triggered because of the discrepancy regarding the full value of the contents and stock.

Due to the fact the record store owner had not properly declared the full amount of their contents and stock, the insurer paid out a total amount of $11,830. This meant that the store owner was underinsured and out of pocket by $3,346.

How to make sure your business is not underinsured

Fortunately, making sure that you have an adequate level of cover is as simple as regularly reviewing and updating your insurance policies.

These three steps can help you ensure that your business is not underinsured.

Step 1: Conduct a risk assessment

Conducting a comprehensive risk assessment can help SMEs identify potential threats that could impact the business. To conduct a risk assessment, start by carefully evaluating the daily business operations, the premises, equipment and stock to narrow down likely areas of risk.

Take into account factors like natural disasters, cyberattacks, theft and liability exposures. By better understanding the threats most likely to affect a business, small business owners can better determine the type and level of coverage that may suit their needs.

Step 2: Update your property and asset values

Business assets change over time, no matter the industry. But it will also depend on stock acquisition, upgraded or new equipment, and expanding operations. It’s important for business owners to regularly assess the value of their assets so that their insurance coverage reflects the true and accurate worth. Simple things like conducting an inventory check, reviewing market prices, and keeping up-to-date financial records can all help.

Step 3: Review your insurance policies

A business’s insurance needs will evolve over time. This is why it’s a good idea to regularly review insurance policies. By checking policies on a regular basis, business owners can help to ensure that their policies match up with current risks and asset values.

If your business has expanded, added new services, hired more staff or changed locations, it may be a good idea to review your policies to make sure they are still aligned with your operations.

BizCover is here for small businesses

Underinsurance in Australia can become a real problem for small business owners if something were to happen to their business – whether that’s a natural disaster, a cyberattack, a public liability claim, or any kind of event that could potentially halt operations.

At BizCover, we understand that small business owners are often time-poor and working within a tight budget. That’s why we make it easy for you to compare quotes from some of Australia’s leading insurers. It’s fast and easy to purchase, renew or review your insurance policies through the BizCover platform. For on the go cover, go BizCover.

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.

The provision of the claims examples are for illustrative purposes only and should not be seen as an indication as to how any potential claim will be assessed or accepted. Coverage for claims on the policy will be determined by the insurer, not BizCover.