4 Ways To Check if Your SME Is Underinsured (and What To Do)

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About two-thirds of small-to-medium enterprises (SMEs) are underinsured or have the wrong kind of insurance (or no insurance at all), according to insurance industry reports.

The pitfalls of not having the right cover mean your business could be out of pocket when disaster hits. Even worse, if you’re legally or contractually obliged to have a certain level of insurance but don’t have it, you risk being hauled through the courts.

You can avoid these issues, though.

We’ve outlined the top four errors SMEs make when it comes to securing insurance. By the way, this official government website gives a good overview of types of business insurance to mitigate risks.

Mistake 1: Underestimating the value of property or assets

The asset value listed in your balance sheet – the sum insured - is unlikely to be the replacement value.

So, to work out that value, be sure to take these factors into account:

Inflation

Seasonal fluctuations

Extra costs to rebuild, such as for engineers or architects

Exponentially increasing building materials costs

Debris removal fees, which escalate if asbestos is involved

Complying with updated preservation and regulatory requirements

The price increase for replacing plant and equipment rather than relying on what you paid for it

How long your business will need to wait to receive a replacement piece of plant or equipment.

Mistake 2: Guessing business risks

The pandemic and natural disasters over the past few years are telling reminders that businesses should regularly review and update their formal risk assessment. Aim for quarterly. Typically, you’ll categorise your risks as regulatory, operational, strategic, and reputational. An expert, such as a surveyor, can help assess property risks including fire and theft.

Next, assess and prioritise your risks and roll out strategies to reduce, control and even eliminate them, where possible.

Mistake 3: Only taking out basic cover

Once you’ve done your formal risk assessment, you’ll have a good insight into what could go wrong. Your business may have the contractually required insurance cover, but has opted out of anything more. While your premium might be lower, this approach means you could be significantly out of pocket after the following events:

Burglary

Tax audit or investigation which could cost thousands of dollars

Downturn in your key market

Employee makes a claim about harassment or bullying at work

Ransomware attack means your customers’ privacy has been compromised

A third-party makes a property or injury claim against your business, etc.

Mistake 4: Not being aware of policy limits

When you take out insurance, you’ve agreed to a dollar limit on your policy. Insurers allow 15%-to-20% ‘wriggle room’ with the policy limit due to fluctuations in repair and reinstatement costs. If your business suffers a partial asset loss and the dollar value is within the margin, you should be fully covered for your claim.

However, if it’s a total loss, the insurer will limit your policy payout to your ‘sum insured, or for certain policies you may be subject to an under-insurance clause where you will bear a proportion of the loss, if you've under-declared your values at any of your business locations. So, make sure you do your homework and work with an external expert (like us) to arrive at this figure.