The True Cost of Being Underinsured: What Every Business Owner Should Know

When faced with the choice between investing in insurance now or gambling on the potential for a loss down the road, some business owners choose to roll the dice. Unfortunately, this strategy can backfire in a big way.

How Businesses Become Underinsured

Insurance is a fundamental part of risk management. If a business experiences an unexpected loss, such as the destruction of property or a lawsuit, insurance coverage can help the business recover – but only if you have sufficient coverage in place. By the time you’re dealing with a loss, it’s too late to secure more coverage.

Businesses may find themselves underinsured for a few reasons:

• They don’t have necessary policies. Many small businesses have property, commercial auto and general liability coverage, but what about employment practices liability and cyber insurance? If you’re hit with an employee lawsuit or a ransomware attack, your property, auto and general liability won’t help.
• Their policy terms don’t match their risks. Generic commercial insurance is designed to meet the needs of most businesses, but it may fail to sufficiently protect against the risks inherent to your industry. For example, wire fraud has been a problem in the real estate sector. A real estate agency might secure cyber insurance thinking it will protect against this risk, but some cyber policies don’t offer much, or any, coverage for wire fraud. If you don’t know what’s in your policy, you may not have the coverage you expect. If possible, try to obtain coverage that’s tailored for your industry.
• Their limits may not be keeping up with their needs. As property values, construction costs and jury awards rise, insurance policy limits need to keep up. As your business grows, hires more employees, invests in more equipment, and engages in bigger contracts, you will also need to increase your policy limits.

Penny Wise But Pound Foolish

Being underinsured can cost you. It’s like the old phrase “penny wise but pound foolish.” The small amount of money you save now is nothing compared to the losses you could incur.

Claims are often more costly than businesses expect. For example, a fire doesn’t just cause property damage. It also causes business disruption and lost revenue, and the longer it takes for a business to recover, the harder it will be to win customers back. Property insurance can cover building restoration and the cost of lost inventory and equipment. It can also cover lost revenue from business interruption, facilitating a faster financial recovery.

Cyberattacks are another prime example of common losses that come with hidden costs. A ransomware attack against your company could hold your files hostage unless you pay a ransom. If you depend on your computer systems for daily operations, your entire business could be forced to shut down. You may also be looking at added costs from data breach notification requirements and lawsuits over data privacy violations. If you have cyber insurance, you not only have coverage to help with these exposures, but you also receive expert guidance to help you navigate an unsettling and high stakes situation.

What About Federal Assistance?

A government report on Federal Disaster Assistance for Businesses states that businesses often seek government assistance following a disaster to help with things like payroll, cashflow and other needs and expenses. However, businesses are typically expected to use their own resources or insurance to recover, and federal assistance is only supplemental in nature.

When businesses do not have the resources or insurance needed, they may not survive. According to the report, the Federal Alliance for Safe Homes says that 40% of businesses do not reopen after a disaster, and another 25% close a year after the disaster, while the Small Business Association says that 90% of businesses fail within two years of a disaster.

Could You Survive a Disaster?

If you had to close your business to deal with a fire, storm or cyberattack, would you be able to open your doors again? The answer often comes down whether or not you have the right insurance.

• Are your limits high enough to cover the cost to rebuild? Low limits or high deductibles could leave you with major out-of-pocket costs.
• Do you have business interruption coverage to make up for lost revenue? Without this coverage, businesses may find themselves in a hole they can never dig out of.
• Do you have coverage gaps? Gaps can come from not having policies or endorsements you need, or from have policies with exclusions, restrictions and sub-limits that leave you exposed.
• Will you have the support you need during the recovery process? Insurance can do more than just pay for repairs and replacements. For example, a cyber insurer may provide support during a cyberattack to help you mitigate the damage.

Having the insurance you need when you need it may determine whether or not your business survives. Heffernan Insurance Brokers can help you assess you coverage needs and secure policies that fit your business. Learn more.