Underinsurance occurs when your insurance policy doesn’t provide enough cover to fully protect your business. In the event of a claim, if the value of your property, assets, or risks has been underestimated, your policy may fall short, leaving you responsible for significant costs.

Unfortunately, underinsurance is more common than many business owners realise. Let’s explore the key ways it can happen and how you can avoid it.

How Could You Be Underinsured?

1. Incorrect Sum Insured Limit

When setting your insurance, it’s vital to think beyond just your building or physical property. Consider what it would really cost to replace equipment, machinery, stock, and other assets. If your business had to start again from scratch, would your current policy cover the full cost?

2. Inadequate Business Interruption Cover

It’s not just about replacing assets, it’s also about the time it takes to get back up and running. Business interruption insurance covers loss of income while you rebuild. Ask yourself: how long would it realistically take to recover after a major event, and would your current policy protect your earnings during that period?

3. Not Reviewing Cover Regularly

Insurance needs aren’t static. Costs change due to inflation, supply chain issues, rising labour and material expenses, and other market factors. That’s why it’s recommended to review your cover at least every 12 months, ideally with professional guidance, to make sure your policy keeps pace with the real-world value of your business.

4. Underinsurance in Liability Insurance

Liability insurance protects your business against the costs of defending and settling claims. By law, Employers’ Liability insurance must cover at least £5 million, but in practice, most businesses require £10 million to be adequately protected.

Equally important is ensuring the accuracy of the figures you declare (such as wages and turnover). Providing incorrect information can leave you exposed under the Insurance Act 2015, which requires fair presentation of risk.

Protecting Your Business from Underinsurance

The best way to safeguard your business is to work with an experienced insurance broker. They can help assess your true exposure, recommend appropriate cover limits, and keep your policy up to date as your business evolves.

Underinsurance may not become obvious until the worst happens, but by reviewing your cover regularly, you can ensure your business is protected when you need it most.

Sources: AVIVA Underinsurance Guide 2024