Robust insurance cover is necessary for all businesses to help towards protecting them from unexpected threats from fire, flood or criminal activity both physical and digital.
A single uninsured event—can potentially cause severe financial disruption, halt operations and, in some cases, threaten long-term viability. Yet, despite these risks, underinsurance remains a frequently overlooked vulnerability.
Common Causes of Underinsurance:
Several factors contribute to underinsurance in SMEs, including the following but not limited to:
- Outdated property valuations—SME business owners may overlook the need to regularly update the value of their buildings, equipment or inventory, resulting in cover limits that no longer reflect current replacement costs.
- Business growth without policy updates—SME business owners may add staff, locations or assets without adjusting their insurance cover, leaving new exposures unprotected and increasing the risk of uncovered losses.
- Misunderstanding policy terms—SME business owners may misinterpret complex policy language, leading to incorrect assumptions about what is covered, when cover applies and how indemnity limits are structured.
- Focusing solely on premiums—SME business owners may focus on minimising insurance costs without considering the implications of reduced cover limits, broader exclusions or how higher excesses compromise cover.
- Neglecting emerging risks—SME business owners may fail to account for new threats such as cyber-attacks, climate-related events or supply chain disruptions that may not be covered under standard policies.
The Consequences of Being Underinsured:
The financial and operational consequences of underinsurance can be significant. SMEs may face:
- Partial or denied claims – Insurers may not fully cover the cost of losses if cover limits are too low or exclusions apply, leaving the business responsible for the uncovered portion. Or, insurers may cover the claim, but will cover a percentage of the claim by how much you were underinsured. For example, if a property was insured for £100,000 but it should have been insured for £200,000. Insurers will cover 50% of the claim as the property was underinsured.
- Prolonged downtime—Without adequate business interruption cover, a business may struggle to meet ongoing expenses during recovery, increasing the risk of sustained operational disruption or permanent closure.
- Legal and regulatory exposure—Insufficient liability insurance can leave businesses vulnerable to legal claims and regulatory penalties, particularly in sectors subject to strict compliance requirements.
- Reputational damage—Delays in service or failure to meet obligations due to uninsured losses can erode customer trust and harm long-term relationships.
Strategies to Avoid Underinsurance
To minimise the risk of underinsurance, SME business owners should routinely reassess their insurance cover, particularly after operational changes such as expansion, new hires or equipment upgrades. Obtaining professional appraisals of property and assets is also essential, especially during periods of inflation or supply chain volatility.
Additionally, SMEs should evaluate whether their existing policies account for emerging risks like cyber-threats, climate-related events or evolving liability exposures.
Work With a Knowledgeable Insurance Broker
SME business owners should carefully examine policy terms and understand exclusions to reduce the risk of insurance shortfalls. Working with a knowledgeable broker can help uncover overlooked insurance gaps and ensure that cover closely aligns with the SME’s current operations, assets and evolving risk landscape.
Contact Mark Richard for a free audit of your insurance covers to make sure your cover is sufficient for your business needs. Call us on 0117 947 9510 or complete our contact form and we’ll be in touch with you as soon as possible.