The consequences of not having business insurance
In an era marked by soaring living costs, businesses across sectors are grappling with the need to cut back on expenses. Unfortunately, one area where these cost-cutting measures often manifest is in insurance coverage. In fact, 44% of SMEs don’t have any insurance, and up to 40% could be underinsured.1
Every business, regardless of its size or industry, exposes itself to substantial risks when it lacks adequate insurance coverage. This article delves into the ramifications of being both uninsured and underinsured.
The risks of being uninsured
An uninsured business is one that remains entirely bereft of insurance coverage for specific contingencies. Given that not all forms of insurance are legally mandated, businesses may opt to forgo insurance in some areas, thus placing themselves in a precarious position.
But why do businesses choose to remain uninsured? One key factor is the challenging economic climate in the UK. In an effort to curtail overheads, businesses may decide to reduce insurance expenses. For example, while public liability insurance is not legally required, a business opting to forgo it risks being unable to compensate a member of the public should they claim injury or property damage due to the business’s activities.
Additionally, some businesses might remain uninsured simply due to a lack of awareness regarding their specific insurance needs or the risks they face in the absence of proper coverage.
The hidden threat of underinsurance
The confluence of rising living costs and high inflation has created a scenario where lower-cost insurance policies may seem appealing. Business owners are tempted to minimise monthly premiums. However, when these policies leave businesses inadequately covered, the potential losses stemming from claims far outweigh any premium savings.
Underinsurance occurs when a business possesses insurance coverage, but the limits provided fail to offer adequate protection against the risks they seek to mitigate. Consequently, the business remains underinsured, a condition with severe consequences in the event of a loss.
Businesses often slip into underinsurance unknowingly. For example, a construction company may have a business interruption insurance policy in place, but changes in external factors such as Brexit or geopolitical conflicts could extend the time required for normal operations to resume, rendering the existing policy inadequate.
Factors like inflation, economic downturns, labour shortages, and supply chain disruptions can significantly impact a business’s insurance coverage. The cost of replacing tools, machinery, and other assets may rise, or manufacturing may be delayed due to part shortages. These shifts necessitate policy updates to ensure adequate coverage.
Business needs can evolve as well. Revenue may increase, business structures may change, or a shift from private to public ownership may occur. Such changes mandate a review and adjustment of the business’s financial lines insurance to align with the new circumstances.
Under certain conditions, insurers may apply the ‘average clause’ when a business is underinsured. This means that the settlement amount may be reduced proportionally if the insurer determines that the business did not obtain sufficient insurance coverage.
Allianz, in this article, outlines the following example: if a business with an annual turnover of £1 million and £600,000 in gross profit has a business interruption policy, but it’s written with a 24-month indemnity period, the business may only be 50% covered. If the business incurs a loss and claims £200,000 to cover four months of halted operations, they would only receive £100,000 due to the application of the average clause.
Under the Insurance Act of 2015, policyholders have a duty to fairly present their risks, requiring them to disclose all material circumstances they know or should know. If an insurer believes that a policyholder has deliberately understated their sums insured, it may void the policy altogether.
Why some businesses remain uninsured or underinsured
While the risks of being uninsured or underinsured are universal, certain industries and businesses are more susceptible due to their size and nature. Sectors such as property, construction, and SMEs are particularly vulnerable to financial distress if they lack adequate insurance coverage. External factors like economic turbulence, climate change, global pandemic, and shifts in government policies impact the cost and availability of materials, delivery timelines, and labour.
Without the appropriate level of business insurance, companies must bear the cost of compensation claims, including replacements for tools, equipment, stock, and premises repairs. These unforeseen expenses can be catastrophic, particularly for smaller enterprises.
Moreover, some trading authorities and organisations may stipulate a minimum level of insurance as a prerequisite for business collaboration. Failure to maintain the required insurance could result in missed business opportunities.
The importance of regular insurance reviews
Irrespective of their type and size, all businesses should conduct annual insurance reviews. Significant changes in their operations, including financial lines coverage, should trigger immediate reassessments. Brokers play a vital role in not only guiding customers in determining adequate sums insured and indemnity periods, but also in elucidating the broader benefits of insurance, beyond financial protection. These benefits may encompass expert guidance or securing alternative premises, depending on the policy.
The decision to remain uninsured or underinsured in the face of escalating living costs and economic uncertainties carries severe financial consequences. Businesses that opt for such risks may find themselves in dire straits when unexpected events unfold. The role of insurance brokers is instrumental in helping businesses navigate these challenges and ensuring they possess the appropriate coverage for their unique needs. By collaborating with brokers and conducting regular insurance reviews, businesses can mitigate the perils of being uninsured or underinsured, fortifying their resilience against an ever-evolving business landscape.
Our expertise at L Wood is paramount in ensuring that businesses have the right level and type of coverage. We collaborate closely with our customers to assess their unique needs, and can tailor insurance solutions accordingly. Get in touch today!