The Real Cost of Being Underinsured: How Gaps in Coverage Can Hurt Your Business

Being underinsured can be a costly mistake. Although you may save a little in premiums now, you may pay the price when a loss occurs, and the consequences can go beyond straightforward financial harm.

Here are three ways being underinsured can hurt your business.

Uncovered Losses Can Threaten Your Bottom Line

A single loss can be incredibly expensive. According to Property Casualty 360, data from the 2025 National Small Business Risk Index shows that the average business liability claim has reached $97,200, up 18% since 2022.

Rising litigation costs have been a problem, and some jury verdicts have gone “nuclear” with awards of $10 million or more. A report from Sentry found that 82% of business executives say their business would be unlikely to survive a multimillion-dollar verdict, while 72% of executives acknowledge that increased litigation and large verdicts are a significant problem in their industry.

Delays Can Disrupt Operations

Lawsuits aren’t the only type of loss that can threaten your company’s survival. Cyberattacks, property damage, and equipment failure can force your business operations to stop.

Many business owners underestimate the impact of a disaster or assume it’s unlikely to happen, but disasters are a real threat, and they can devastate businesses. According to the U.S. Chamber of Commerce Foundation, most small businesses think they’re ready for a disaster, but only 26% actually have a business disaster plan. Recovery can take much longer than many business owners expect. After a disaster, roughly one-third of small to medium-sized businesses took at least six months to recover.

If you have appropriate insurance coverage, you can use it to get back to normal business operations as quickly as possible, while business interruption coverage can help make up for the losses. Without coverage, you’ll have to figure things out on your own, and that can take significant time.

A Poor Defense Strategy Can Harm Your Reputation

Liability insurers don’t just help with your litigation costs; they also help with your defense strategy.

For small and medium-sized business owners, lawsuits can be scary and confusing. If you can’t launch a good defense, you may end up being held liable when you shouldn’t be, and that can lead to substantial costs as well as damage to your reputation. There may also be times when you proceed with a costly legal process, when a settlement might have been a better option. Once again, this can be very damaging to your company’s reputation.

How Do Businesses Become Underinsured?

Businesses sometimes become underinsured when their policy terms are misaligned with their risk exposures, resulting in coverage gaps. For example, a standard general liability policy excludes pollution claims. That may be fine for some types of businesses, but in some industries, the lack of environmental coverage can be disastrous.

Underinsurance can also occur when policies fail to keep up with business growth. The terms that worked fine for you five or ten years ago may no longer be adequate if your business has hired more employees, increased its revenue or expanded into new operations.

In some cases, business owners may intentionally choose to go underinsured as a cost-saving strategy. This is essentially like gambling with your business. Eventually, you’re bound to experience a loss, and the decision to skimp on coverage will come back to haunt you.

What to Do Instead

When budgets are tight, businesses may be tempted to cut corners on insurance coverage, but that’s a risky move. Instead, it’s important to verify that you have appropriate coverage for your risks. Since your exposures can change over time, this requires regular reviews of your coverage.

If insurance costs are budgetary issue, you can work with your broker to find solutions. This may involve taking on a higher deductible or structuring your coverage differently. It could also involve managing your risks in a way that makes your company more attractive to insurance underwriters.

Heffernan Insurance Brokers can help you secure cost effective coverage for your business. We tailor insurance packages for a wide range of business types and budgets. Learn more.