Most small business owners acknowledge the need for insurance, but around 62 per cent think they may have not have the right cover to adequately protect their business. In a worst-case scenario, the impact of underinsurance can be just as devastating as having no cover at all. Which is to say, it could put you out of business.

“Business owners need to have a view of how much it would cost to replace everything in your business today – it’s important to understand your worth,” says Eleanor Debelle, Managing Director, Consumer at QBE Insurance. To do that, you need to accurately define your business and be clear about the risks you face.

What exactly is underinsurance?

In short, underinsurance is not having adequate insurance or the right type of insurance to cover the total cost of loss or damage to your business in the event of a claim. If the maximum amount an insurer will pay in a disaster isn’t enough to recover your bottom line, you may be left out of pocket.

This can hit in two ways:

• You’re insured for a lesser amount than the total cost of your business, so you’re left short once all insurances are paid out; or
• You don’t have the right type of cover, so when an event occurs that you didn’t anticipate, you’re liable for expenses that aren’t planned.

If you’re underinsured and an interruption strikes, you may not be able to return to normal operations.

WATCH: Underinsurance explained

Post continues after Kochie’s Business Builders video.

Steps you can take to get the right level of cover

Understand your risks

One of the biggest risks that many small businesses fail to adequately address is the risk of interruption. That is, it’s not just the fire taking your office space you need insurance for. It’s also the fact that you won’t be able to adequately operate your business until you get back up and running. This loss of income is something you need to be covered for because your ongoing costs like rent won’t stop when your business does.

There are some key insurances that are required by law (like workers’ compensation insurance) and then there are those you take to mitigate the risks. To ensure you have sufficient coverage, it’s key to understand the specific risks your business faces. That way you can ensure you cover all the critical factors you need to keep operating.

The first step to being adequately insured is to know what your risks are.

“Ensure your business has sufficient coverage and understand the specific risks your business faces to ensure critical factors you need to operate are covered,” says Debelle. “Ensure you have a business continuity plan that is reviewed and tested regularly, so if the worst happens, you have a plan in place to minimise the disruption.”

This plan will help you identify the risks you will need to insure for and those that you can protect against yourself.

Remember to include both direct risks (natural disasters, legal, security, health and safety) and indirect risks. These don’t directly impact your business, but still negatively effect your operations. An example of an indirect risk might be an impact to your supply chain that means you can’t get the product you need to sell.

These risks can differ from industry to industry, whether you’re a tradie, a shop owner or an office worker.

Don’t use guesswork

If you find yourself guessing the cost of replacing, repairing or rebuilding your business premises or contents, stop right there. It’s far better to use an insurance calculator to evaluate both your building and your contents needs. It will step you through all of the variables needed to correctly estimate the value of your assets.

Should you still feel vague about replacement costs after using a calculator, it’s best to consult with a broker who can help you create a better estimate. A professional valuation of your building for insurance replacement cost will make sure you are properly insured.

Make sure you cover true replacement costs

Unless you insure for true replacement value (that is, what it would cost to replace whatever is damaged or destroyed in today’s costs), you risk being underinsured.

“A key thing to bear in mind is whether your building and contents insurance is high enough to cover replacement costs if the worst happens,” advises Debelle. “You need to be adequately insured for the replacement value of the items as opposed to the original value written in the books.”

That means correctly estimating the cover needed when you take out the policy (see above), plus reviewing the sum you’re insured for regularly. A good time to do this is when your policy comes up for renewal, but also make sure you review your true replacement value whenever change happens in your business.

“This is often overlooked because assets in a business context can be changeable by a range of factors, including exchange rates and inflation,” Debelle says.

Be prepared for natural disasters

The past few years have taught us that anything can happen at any time. Ensuring your have sufficient insurance to cover you for both the disaster and its aftermath is crucial.

“We have seen a lot of focus this year on natural disasters. You should consider both the immediate impact and the interruption that follows if your business is unable to trade after a big incident such as a fire or flood,” says Debelle. “It’s important to consider how you might keep cash flowing if your business is interrupted, making business interruption insurance a key consideration.

“Customers should avoid setting their gross revenue amount too low or having too short an interruption period (12 months is often too short if a full rebuild is required). Remember, repairs may take longer than you think to complete.”

Definitely plan ahead

To stay on top of your insurance needs, review that business continuity plan that and test it regularly. This is your practical plan for how your business will prepare for, respond to and continue to operate after an incident. That way, if the worst happens, you have a plan in place to minimise the disruption.

“You should take all types of risk into consideration including legal, financial, environmental and operational,” says Debelle. “Being proactive and assessing your insurance coverage frequently is crucial as circumstances can change in a business environment and your insurance should always keep pace with your business.”

Seek expert help

The more you can customise your insurance exactly to your business needs, the less you risk underinsurance. A specialist insurance broker or agent can tailor a solution to suit your needs. You can also directly contact your insurer for help in understanding your coverage options and your policy.

There’s also plenty of information online that can help you choose the right coverage. Be sure to check reputable sources like the QBE website.

This article is brought to you by Kochie’s Business Builders in partnership with QBE Insurance.

The advice in this article is general in nature and has been prepared without taking into account your objectives, financial situation or needs. You must decide whether or not it is appropriate, in light of your own circumstances, to act on this advice. You should ensure you obtain and consider the Policy Wording or Product Disclosure Statement and Target Market Determination for the policy before you make any decision to buy it. For more information, visit www.qbe.com.au.

Feature image: Eleanor Debelle, QBE Insurance