Underinsurance explained: Does your business have the coverage it needs?
For small business owners, having enough insurance coverage is crucial for protecting your business and future planning. Here are common situations where small businesses can end up underinsured, along with tips on how to review and update your insurance to make sure it meets your specific needs.
What is underinsurance?
Underinsurance means not having sufficient coverage to financially protect your business from potential risks or losses. This occurs when your insurance policy doesn’t fully cover the full costs of damages or claims, leaving your business financially exposed to out-of-pocket expense in times of crisis.
How can underinsurance occur?
Failing to reassess coverage: Market changes like inflation or new regulations, as well as business growth, may make your existing coverage inadequate. Therefore, not reviewing your coverage regularly could put your business at risk of underinsurance.
Example: After expanding its seating and upgrading kitchen equipment, a café didn’t update its insurance. A fire broke out and caused damages to the cafe. The existing coverage was enough before the renovation but isn’t anymore, leaving the café underinsured and facing significant financial losses.
Balancing costs with coverage: Selecting minimal levels of coverage to save on costs, instead of opting for a proper insurance plan that fits the unique needs of your business can have major financial consequences.
Example: A small-town bakery located near a river opted for basic insurance coverage to reduce costs, choosing to exclude flood protection. Following an unexpected flood, the owner faced costly repairs out-of-pocket, which could have been avoided with a comprehensive insurance plan customized to address the bakery’s specific risk exposure.
Lack of awareness of insurance products: A lack of clear understanding of the different types of insurance coverage options available can lead to underinsurance, leaving your business financially vulnerable.
Example: A clothing boutique owner uses their personal car for deliveries, assuming their personal auto policy covers commercial usage. However, a personal auto policy often contains exclusions for commercial activities, which results in the boutique owner not receiving a payout if they were to get into an accident while making deliveries.
Address underinsurance in 4 easy steps:
- Regularly review and update your coverage: As your business grows or changes (e.g., revenue increases, new locations, new vehicles, or expanded services), inform your insurer to cover new risks.
- Get a professional property evaluation: This ensures your coverage reflects the actual cost of replacing or repairing property, especially in a changing economic environment.
- Consult with licensed insurance professionals: They can assess your specific risks and recommend the right insurance products for your business.
- Understand your policy details: A thorough understanding of your policies, including exclusions and limits, can help with effective risk management.
Underinsurance is a common yet addressable issue. By understanding the common scenarios that lead to underinsurance and taking proactive steps to ensure adequate coverage, you can increase your financial security as a business owner and ensure your business is protected from unexpected events.
TD Insurance is committed to helping you better understand your coverage options and create a plan that's tailored to your unique business needs. Explore how you can get flexible coverage options with TD Insurance so that you only pay for the coverage you need.
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The content on this page is for general information purposes only and does not constitute legal advice. Any coverages described herein may be subject to additional eligibility criteria, limitations and exclusions. In the event you make a claim, potential indemnification is also subject to the receivability of the claim and the type of coverage you bought.
In the case of conflict between the content on this page and your policy wordings, your policy wordings shall prevail. Please speak to an Advisor or consult your policy wordings for further details.