Mind the gap: Five underinsurance problems that happen too often

Mind the gap: Five underinsurance problems that happen too often | Insurance Business

Mind the gap: Five underinsurance problems that happen too often

CGU Insurance’s Twain Abbott provides his top tips for ensuring small business owners don’t fall into the underinsurance trap.

For a small business, unexpected events or disruptions can significantly impact operations, lead to an acute drop in sales and cash flow, and in some cases force owners to close their doors.

For all the planning and preparation involved in starting a business, many small and medium enterprises (SMEs) fail to take out an adequate level of insurance cover. A recent survey of 850 SMEs conducted by CGU Insurance found that one in seven believe they may be underinsured while, one-tenth claim they chose to have no cover at all.


A decision prompted by the need to save time and money in the short-term can result in significant consequences and losses for business owners. Insurance advisors can help steer customers away from falling into the underinsurance trap.

1:  Ensure cover reflects the true replacement value of stock, equipment or buildings

A common trap is where business owners might choose to insure for less than the replacement value in order to reduce their premium. Another potential risk is neglecting to review the sum insured when new equipment or new products are introduced. When the time comes to make a claim, the business owner is left out of pocket as the sum insured no longer reflects the cost to replace or rebuild.

2: Set a sufficient indemnity period for business interruption cover

Some 81% of SMEs admitted that an unforeseen business disruption would have a severe impact on their business, yet only 27% have business interruption insurance. Of those that are covered, it’s likely the agreed ‘indemnity period’ is insufficient. The indemnity period is the time for which the insurance policy will pay for the shortfall in profit.

3: Thoroughly assess the business and its potential risks

Significant shortfalls were found among SMEs that felt 100% confident they had the appropriate insurance cover. Some business owners choose to arrange insurance only for compulsory covers, such as tradespeople who buy liability cover only, to work on customers’ premises, or start up businesses needing fire cover to secure finance. Many SMEs do not have business interruption, burglary or money, employee dishonesty, tax audit, or directors and officers liability insurance. These covers protect the cash flow and often the ability to continue doing business.

4: Highlight the importance of continuity for liability cover

Many smaller businesses and tradesmen cancel their liability insurance when they’re between contracts to reduce premiums. As a result, they often neglect to reactivate their policy when they’re back on the job. Liability cases can lead to lengthy court cases and significant legal costs.

5. Ask, are they being optimistic?

Encourage business owners to understand the potential risks to their business such as a fire, burglary, machinery breakdown or even someone slipping on their premises. Losses could cost thousands of dollars for the sake of initially saving just a few hundred dollars.


Twain Abbott is National Underwriting Manager for SME at CGU Insurance.