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Are you fully covered? The problem of underinsurance

  • Adroit Insurance and Risk
  • December 4, 2015

All too often cash-strapped SMEs turn their attention to insurance when attempting to cut costs. We refer to it as “The Umbrella Syndrome”; you don’t think you’ll need your umbrella on a nice sunny day, but then all of a sudden the weather turns…

Unfortunately as many as 80% of Australian businesses are underinsured. For many business owners, trimming back cover seems an easy option because they believe the chances of actually having to make a claim are slim. Not true. In fact, they’re gambling with the survival of their business for the sake of a few dollars.

Think about this: If your business’ contents and stock would cost $500,000 to replace and you only insure them for $300,000, you may feel that it’s a risk worth taking because you’re not likely to lose everything. But in fact you could still take a big hit even with a partial loss, because your insurer may decide that you’ve opted to take on some of the risk yourself (in this case 40%) and apply what’s called an “average”. Under this rule, if you suffered a loss of $100,000, the insurer has the option to only pay out $60,000.

Besides not taking on unnecessary risk by deliberately underinsuring, you should take steps to ensure you’re consistently properly covered. This includes reviewing your sums insured every 12 months. Small businesses can grow rapidly, buying new equipment or expanding premises and you can easily fall into underinsurance without realising.

As you grow, work hard to calculate the correct cost of replacement, new for old. This includes factors like removal of debris, legal costs, and professional fees, as well as the value of assets. When rebuilding there may be extra costs that arise from complying with government legislation or standards, and in the wake of a natural catastrophe construction costs can soar due to increased demand.

Finally, get a thorough assessment of the risks your business is facing. Go beyond the most basic cover – your risk adviser can help you do this. Their expertise is invaluable and they’ll help you get different types of cover, such as business interruption insurance, which in a land of floods, fires and cyclones can potentially save your livelihood. There are plenty of other risks besides natural catastrophes to worry about too – such as the growing threat from cyber criminals. Your risk adviser knows all!

As you may be able to tell, calculating the correct amount of cover is a complex process and trying to do it on your own is a recipe for disaster. Let us help you get it right. Because if you get it wrong, you could be paying a very high price indeed.

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