Causes and Consequences of Underinsurance

As a business owner, there are few things more horrifying than finding out you’re underinsured after a disaster. Whether it be a flood or destructive building fire, it is vital to have proper insurance policies to protect your business from any interruptions—particularly for SMEs with minimal financial flexibility.

It is for this reason that many businesses purchase business interruption (BI) policies for peace of mind in the event of an unexpected disaster. Unfortunately, it is all too common that the BI policy, that is meant to be your safety net, fails to cover the entirety of a company’s loss.

The Chartered Institute of Loss Adjusters (CILA) found in recent research that an average of 53 per cent underinsures 43% of Business insurance policies. Luckily, this is easy to prevent.

Protect yourself from Underinsurance:

• The length of your indemnity period – According to industry research, roughly 75% of BI policies have an indemnity period of 12 months. However, one year is often not enough time for a business to recover after a financial disaster. When taking out a policy, be sure to calculate and set a realistic indemnity period that gives your business enough time to reach financial stability. This is typically between 18 and 24 months.
• Ensuring adequate sums are insured – It is often the case with BI policies that the value of a commercial property can become outdated and not represent the current value of your business. It is important to keep this updated with an annual review with your broker to ensure the accuracy of your valuation.
• The inclusion of wages in the gross profit calculation – When calculating your gross profit, it is essential that you include staff wages and utility costs. The average definition of gross profit tends to exclude these two costs and according to the CILA survey, 40% of respondents listed inconsistent definitions of gross profit as the primary cause of BI underinsurance.