Major Risks for Businesses That Are Underinsured

A study published by the Institute for Legal Reform (ILR) demonstrates the negative impact of not having proper commercial insurance coverage. The report shows that all U.S. businesses incurred a total of $343 billion in liability costs, and self-insured or uninsured companies bore more than half of that burden ($208 billion).

While the financial impact was devastating for most businesses paying those claims out of pocket, liability wasn’t their only risk.

Here’s a look at the common financial or legal risks businesses are exposed to if they don’t have sufficient insurance protection. 

5 Underinsurance Risks for Businesses

The main risk for an underinsured business is when a covered event occurs, their insurance may pay for only a part of the claim or loss. Covering the remainder out of pocket may threaten the survival of the business.

Here are some of the risks that underinsured businesses could face:

1. Financial loss: financial/asset losses from disasters like fire, storm, or flooding.
2. Liability lawsuits/claims: Compensatory damages or settlements due to customer injuries, unsatisfied clients, damage to clients’ property, or labor disputes can hurt underinsured businesses’ profits.
3. Regulatory risks: In most states, certain insurance policies are mandatory for businesses, such as workers’ compensation insurance. Non-compliance with federal or state coverage requirements attracts hefty fines, license revocation, and jail time.
4. Reputational damage: Without adequate cyber liability coverage, you may suffer major customer fallout after a data breach event.
5. Business/Revenue loss: Severe damage to your business building or loss of mission-critical assets may cripple your operational/production capacities. These events can trigger bankruptcy for business owners without adequate property and business interruption coverage.      

Why Businesses Are Underinsured

When a business is underinsured, it generally means one or all of the following:

• They have only a few of the commercial insurance policies necessary for full protection. For example, they may General Liability, Employers Liability, Workers’ Compensation, and Commercial Auto Insurance, however, they are a business that handles electronic customer data, and they don’t carry cyber liability insurance
• Their coverage falls below the maximum limit for a specific policy
• They do not have protection in place, such as an umbrella policy for when they exceed maximum limits for a particular policy
• They are missing necessary insurance riders or endorsements to extend protection for any unique aspects of their business which are important to protect

Some of the reasons why many businesses do not have sufficient commercial insurance coverage are:

• To reduce costs and increase profit
• The business owner doesn’t realize they need certain coverage (they don’t know what they don’t know)
• The business owner undervalues its company assets, thus underestimating the magnitude of their loss/risk exposure
• The owner has growth projections but does not consider the impact of growth on their coverage needs
• Regular commercial insurance policy reviews which often reveal any coverage in gaps are not scheduled

One of the best ways businesses can minimize their exposure to potential financially crushing outcomes is to have operational exposures, insurance coverage needs, and current policy forms reviewed and analyzed by a knowledgeable, licensed insurance agent to ensure sufficient insurance in place. To make sure your business is not underinsured, contact your Independent Insurance Agent or have them contact PMC Insurance Group for more information.