Adequate insurance coverage – The three pitfalls for SME’s

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For SMEs facing squeezed margins, insurance premiums may seem like a grudge purchase. Some products may be regarded as a discretionary overhead among those who don’t fully understand their risks or how being underinsured could prove catastrophic to their business. Yet insurance can be key to SMEs’ ongoing survival by providing a financial safety net in unforeseen circumstances, when they are the least able to withstand substantial losses.

Having weathered two years of pandemic-related disruption, and now facing further economic stresses and strains, it’s more important than ever for SMEs to avoid the three pitfalls that can lead to underinsurance. This article explores each in turn and looks at how together with your insurance broker you can get confidence that your insurance policies will perform at a time of need.

Pitfall number 1: Not buying adequate cover

Ensuring your business is adequately covered involves making accurate judgements about the amount insured and the cover required. A rough estimation or out-of-date valuation of, for example, commercial property, stock, contents, plant or equipment, could mean that in the event of a claim, the actual losses exceed the maximum limit that the insurer will settle, and the business will be left out of pocket. It’s important to insure plant, machinery and equipment for its current replacement value (i.e. on a new-for-old basis), to avoid a protection gap, as well as the potential for operational disruption if the equipment is business-critical.

When it comes to property, it’s vital to insure for the rebuild cost, rather than market value, should the premises be severely damaged or destroyed. Listed or heritage buildings often have a higher reinstatement cost due to the need to adhere to traditional forms of construction and specialist materials.

While underinsurance is typically due to an innocent oversight, a small minority of policyholders may look to reduce their premium by failing to declare an accurate sum insured. This not only increases the risk of a shortfall but can also void the cover altogether.

Pitfall number 2: Lack of awareness of specialist cover

SMEs are not always aware of the existence or relevance of specialist, non-mandatory covers, its critical that your insurance broker understands the intricacies for your business so they can identify the peripheral risks and insurance requirements and give appropriate advice. For example, the pandemic prompted businesses of all kinds to adapt to remote working and arms-length customer interactions, accelerating the digital shift already underway. As a result, businesses are increasingly reliant on the resilience of their IT and more vulnerable than ever to attack by cyber-criminals and fraudsters. It’s in your best interest to explore your cyber exposures and consider how insurance can protect your operations, your customers’ privacy and your brand reputation against the growing threat of information security breaches.

The perceived need for Directors and Officers Liability cover is low and many directors erroneously assume they’re protected by their company’s limited status, or that the business would automatically foot the bill for defence costs if action were taken against them. However, as environmental, social and governance requirements grow more stringent and our society becomes increasingly litigious, now is the time to consider the liability attached to your role, and that your own cash, house, pension pot or even their liberty could be at stake in the event of a claim.

Smaller firms can really benefit from a broker who acts as a business advisor who educates on potential exposures, rather than simply selling insurance. By taking the time to truly get under the skin of your business, your insurance broker will be better placed to offer insight on products you may not even realise you need.

Pitfall number 3: Not updating cover as needs change

As dynamic entities, a lot can change for SMEs within a single 12-month policy window, and the risk and quantum of claims that could be brought against a business can alter accordingly. This is reinforced by the findings of RSA Insurance’s recent study of owners and leaders of over 200 UK SMEs, in which respondents reported that their biggest opportunities over the next two years will stem from diversification of products, services and the customer base, incorporating new ways of working, and increasing digitisation.

The pandemic prompted many SMEs to reinvent their operating models – for example, shutting retail outlets in favour of online trading, or downsizing their office footprint as hybrid working becomes the new norm. Many who reduced their coverage during the pandemic may have neglected to revise it upwards when business activity picked up again, so policy limits may no longer be in line with turnover, profit, or payroll. If businesses resort to stockpiling goods or materials in anticipation of shortages due to geopolitical events and increased trading friction, elevated stock levels can also have an impact on insurance requirements.

New or wider types of cover will be required for those who have changed the use class of their premises or have modified or diversified their commercial offering. To illustrate, a restaurant operator starts offering food deliveries. It hires an owner-driver and expects the employee to arrange adequate cover by extending their own private vehicle insurance for business use. However, the employee’s policy excludes use for ‘hire and reward’, which applies to food delivery. The restaurant finds itself on the receiving end of a claim from the employee for injury sustained while driving on business. Because the restaurant failed to advise their Employer’s Liability insurer of the material fact that the business now delivers food, the insurance company seeks a recovery from the restaurant for monies it has had to pay to the employee in compensation.

That’s why the key message for you and your insurance broker is “don’t just renew – review”. You are encouraged to let your insurance broker know of any significant changes to your property, assets, stock or activities straight away, rather than waiting until annual renewal looms.

This article is adapted from an original post by RSA Insurance which can be found here. 

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