How to avoid the pitfalls of being uninsured or underinsured
Tools & Resources
Key learnings
- Many businesses are uninsured or underinsured for a variety of reasons, such as a lack of knowledge about insurance, cost cutting, or rising costs meaning replacement asset values increase beyond the cover.
- Thinking ahead about your activities in the next 12 months can help prevent you being uninsured or underinsured, and save you time, money and hassle.
- Build insurance into your quarterly reviews and planning to ensure you don’t miss key developments in your business that mean your cover needs updating.
- Consult an insurance broker to get advice on the right types and level of cover for your business.
We usually don’t want to think about insurance – personally or for our businesses. Why would you want to think about the worst that could happen? Or to pay for something you hope you never have to use? So, it’s understandable that lots of businesses find themselves uninsured or underinsured. Of course, if the worst does happen, you also don’t want to be left wishing you were insured properly. Here, we explain how you can avoid the pitfalls, so you can enjoy running your business instead of worrying about the future.
With employers’ liability insurance often the only legally required type of insurance a business must have, more than a third of SMEs go without other types or don’t have enough cover for a range of reasons.
This is what is meant by uninsured or underinsured: You either don’t have any insurance cover for a particular risk – or you have some insurance cover, but not enough to fully cover the value of your assets or the extent of your liabilities. Areas often underinsured are property and contents including stock, plant and equipment.
There’s nothing wrong with this if you are fully informed and prepared to accept the risks and financial impact if something goes wrong.
However, that's usually not the case. So why might you find yourself uninsured or underinsured?
Common reasons for being uninsured or underinsured are:
- Lack of awareness or knowledge – you may not know the types of insurance you need or be aware of the risks you might face.
- Not reading or understanding the small print – you may skim over things or not fully understand the terms and conditions of your policies, or the exclusions and limitations that apply.
- Being out of date – you might not review your cover regularly or update it when your business changes.
- Cost-cutting or budget constraints – you may be trying to save money by reducing or cancelling your insurance cover.
- Mindset – you may think of insurance as an unnecessary expense or feel you could cover any losses or expenses yourself if something happens.
- Underestimating values – you might not accurately calculate the value of your business’s assets or the potential losses you could incur.
- Not adjusting replacement values – inflation of costs, appreciation and depreciation of assets can mean it’s more expensive to replace items with a new one of the same kind and quality in the future, as it likely won’t be the same amount you paid for it or what it says on your balance sheet.
As your business’s circumstances and costs change, it’s easy to forget to check in with yourself about insurance in the excitement of launching a new product or service, preparing for an event, or scaling up stock to meet demand when your product hits the big time.
How to prevent being uninsured or underinsured
As is often the case, the solution is to bring your awareness to it, get the right advice and get organised, so that you are reminded at appropriate times to look after this aspect of your business.
Click each heading and try these steps:
1
Assess your risks and needs.
Identify the types of risks your business faces and the potential losses you could suffer. Then, think about the level and type of insurance cover you need to protect your business from these risks.
You can get some idea of this by considering the legal requirements, industry standards, and best practices for your sector and profession. Our article on what types of insurance you need will give you some ideas on common types of cover you might need.
Think about assets that might have changed in value a lot too – such as vehicles and buildings. Ensure you increase your estimates of what they would cost to replace taking account of high levels of inflation the UK has experienced.
UMi partner Green Insurance recommends getting a professional up-to-date rebuilding cost valuation from a surveyor who is regulated by the Royal Institute of Chartered Surveyors (RICS). This is different to a market valuation and will account for building materials and labour costs, as well as professional fees such as architects.
For example, you may have property insurance, but due to rising inflation the sum insured falls to lower than the actual cost of rebuilding or replacing your premises, equipment, or stock. This means that if your business suffers a fire or a flood, you will only receive a partial payout from your insurer, and you would have to cover the rest of the loss yourself. You need to think of the worst-case scenario that everything is destroyed and insure for the full replacement cost.
As well as determining what you need now, consider your activities for the next 12 months and factor these into your risks and potential losses.
Doing this will allow you to get quotes that cover these future risks in your upcoming annual premium. This will give you peace of mind, as you won’t need to remember to call your insurer to update them. It will save you money because you won’t later incur admin fees to update your policies. You may also find that adding a cover at the same time you take out others will be cheaper than adding it later, as insurers often bundle common types of insurance together and offer a discounted rate.
For example, if you don’t currently have public liability insurance – which covers the legal and compensation costs if a member of the public is injured or their property is damaged because of your business activities – and you are planning to exhibit at some events in the coming year, you may wish to consider getting this cover.
It can be something as simple as a person tripping on a trailing cable. If it’s your property that causes their injury, the person could sue you for negligence. If you’re not covered, you would have to pay for costly legal fees and the settlement out of your own pocket.
2
Shop around and consult a broker.
Arm yourself with the information you need by getting three to five quotes from reputable insurers or get some advice from a broker.
A good broker will help you review your needs and ensure you are appropriately protected without paying for cover you don’t need, saving you money. They will also have a good understanding of different insurers’ customer service, so they can recommend the best, potentially saving you lots of hassle in the event you need to make a claim.
You could speak to them about your upcoming plans, and they can help you compare quotes with the cover you need in future months versus adding it later.
You want the best coverage at the best price, so check the policy details, such as the sum insured, the excess, the exclusions, and the endorsements. Ask questions and seek advice if you are unsure about anything.
3
Review and update your cover regularly.
Review your insurance cover at least once a year, or whenever there are significant changes in your business.
Thinking ahead about future activities should reduce the number of updates you need. However, it’s worth making insurance an agenda item when you do quarterly reviews and planning. Consider if anything needs to change now or in future in your existing level of cover or types you have.
Some changes that could trigger you to make updates include:
- Expanding your team
- Holding more stock eg to counter supply issues
- Relocating to new premises
- Refurbishing or making changes to your property such as installing solar panels or ground source heat pumps
- Acquiring a business or being acquired by another company
- Diversifying your products or services, or entering a new market
- Buying new assets such as machinery or vehicles
- Hosting or exhibiting at events
Adjust your cover accordingly to reflect the current value of your assets and the extent of your liabilities. Inform your insurer of any changes and keep your records up to date.
By following these steps, you can ensure that your business has adequate insurance cover for its needs, and avoid the pitfalls of being uninsured or underinsured. This way, you can have peace of mind and focus on running your business.
Next steps...
- Find out what types of insurance cover your business needs.
- Book your free insurance review with Green Insurance Group.