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What it Means to be Underinsured and how to Avoid it Happening to your Business


Insurance is designed to help you manage financial risk, pay insured claims promptly and help you get your business back up and running.


The worst time to find out that your business is underinsured is when your claim is part paid, or you realise that your insurance doesn’t cover all your needs.

So, what does it mean to be underinsured and how can you avoid this for your business?

What is Underinsurance? Simply put, underinsurance means that your insurance doesn’t provide the level of cover your business needs, especially in the case of a large loss or a disaster. For example, if your commercial property burns down and the sum insured is valued at 70% of what the property is really worth, then you won’t have enough money from the insurer to rebuild, therefore you may have to pay the balance of the rebuilding costs yourself.

Common Causes of Underinsurance for SME Businesses Lack of correct insurance can be due to lots of reasons; Some examples are:

  • Lack of insurance cover.

80% of SME’s don’t have insurance to cover loss of Business Income or Revenue, following a claim, with the majority closing for good without adequate cashflow. This type of insurance pays the ongoing fixed costs of the business, as well as staff and the owners’ wages, while the business cannot trade, or the building is being repaired.

  • Insufficient sum insured or lack of cover for specific items.

This can result from underestimating the value of specialist equipment or stock at peak periods. For example, if there is a $25,000 limit on portable equipment and the replacement value is $50,000 when making a claim, then the amount paid under the policy is less than the replacement cost.

  • Type of damage is not insured.

This include flood and bushfire damage not being insured, as the risk was not considered, not properly understood or seen as too expensive. These events can be catastrophic and put the company out of business.

How to Avoid being Underinsured There are two easy ways to help in minimising the possibility of being underinsured.

  1. The first is to speak to Risk Guidance Insurance because we understand your industry and can advise and assist you on how best to review your insurance and risks, ensuring you reduce the risk of your business being underinsured.

  2. The second is to regularly review your insurance cover, particularly when changes are made to your business. These can include renovations, machinery upgrades or expansions. Also keep in mind that costs increase over time, so whilst your estimates of sums insured or the types of cover might have been correct 5 years ago, you may not have the right cover today.

Do you Have to Pay or Contribute to the Loss if you are Underinsured? The answer is probably, yes because there are average replacement clauses in property policies for example. This means that if you are underinsured (less than 90% of the replacement value), you may be contributing to the rebuilding or replacement cost. If you don’t have the type of insurance you need, you may have to foot the entire bill.

To decide what type of insurance policies are suitable for your business, talk to RGI today.

General Advice Warning The information provided is to be regarded as general advice. Whilst we may have collected risk information, your personal objectives, needs or financial situations were not taken into account when preparing this information. We recommend that you consider the suitability of this general advice, in respect of your objectives, financial situation and needs before acting on it. You should obtain and consider the relevant product disclosure statement before making any decision to purchase this financial product.

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