How much business insurance is enough?

When it comes to business insurance it’s important to make sure you have the right level of coverage. This will depend on the type of business you have, and the risks associated with it.

Property Insurance

Insuring your business premises, fixtured and fittings, business equipment and stock protects your business from losses caused by theft, fire or flood. It is important to regularly review your sums insured to ensure that your property is insured for the correct amount.

Business Interruption Insurance

This cover protects your business against the knock-on effects and additional costs of incidents that stop you from working. Underestimating the sum to be insured, and the indemnity period, could lead to a significant financial shortfall following a business interruption event, potentially leaving your business in financial difficulty.

What is underinsurance?

Underinsurance occurs when you do not have enough coverage to meet your needs. This can be a problem if you need to make a claim, as you may not receive the full amount of your losses.

For example, if you own a small retail store and you have a fire that destroys your building and all of your equipment and stock and you had a business insurance policy with a sum insured of £100,000, but the cost to rebuild your store and replace your property is £200,000, you are underinsured by £100,000 and will have to pay for the remaining costs out of your own pocket.

What happens if I am underinsured?

Under insurance exists when the amount(s) specified in your policy are not enough to cover the full cost of rebuilding, repairing, or replacing your insured property. Being underinsured will result in you being out of pocket in the event of a claim, since any claim could exceed the maximum amount that would be paid out by your policy.

There is also the ‘average rule’ insurers use to calculate claims to consider. It means if you are under insured, your Insurers can reduce the amount they pay in the event of a claim by the same proportion that you are underinsured, reducing your claim settlement amount further.

The only way to avoid this is for you to conduct a regular review of your sums insured and take a realistic view on whether the level of cover you have is enough to allow for a worst-case scenario.