Many business owners look to cut costs by reducing insurance coverage, but inadequate insurance limits leave companies dangerously exposed. Here are some of the significant risks businesses take on when they are underinsured:
Catastrophic Financial Loss
The biggest risk is that a major loss event like a fire, lawsuit, or burglary bankrupts the underinsured business. Without enough coverage, companies can't recover and are forced to shut down. Even well-established businesses can collapse under the financial strain of uncovered losses.
Business Interruption
Underinsured companies that suffer property damage often lack ample business interruption coverage. Insufficient limits mean they can't afford to rebuild or replace assets quickly. Their operations remain closed longer while they slowly recoup losses, resulting in substantial lost revenue.
Reputational Harm
Being underinsured can hurt a company's reputation after a loss. Their financial struggles become publicly visible, and customers lose confidence in the business. This causes long-term brand damage and reduced patronage.
Personal Liability
With inadequate general liability coverage, owners' personal assets are at risk if sued. Their homes, retirement savings, and investments could be seized to cover legal judgements the business insurance should pay.
Employee Retention Issues
Insufficient workers' compensation and disability coverage costs employees who get injured or ill. They suffer lost wages and uncovered medical bills, breeding resentment towards the company. Top talent leaves for employers who properly protect staff.
Inability to Secure Financing
Banks and investors are wary of underinsured businesses, seeing them as risky ventures. It's harder to secure financing for growth and operations without proper risk transfer set up.
Juan Ortiz Romero - Director of Premium Finance Sales
Trying to minimize premiums by reducing coverage often backfires terribly. Work with an experienced broker to buy adequate insurance that matches your risk profile. While underinsuring may seem inexpensive initially, the long-term consequences for your business make it extremely costly.