From inadequate levels of income protection and life insurance arrangements, to grossly undervalued business assets and equipment, alarmingly few New Zealanders have anything remotely like what they’d actually need in the event of a claim. In other words, as a nation we’re flying by the seat of our pants. 

Small businesses have one of the highest incidences of underinsurance, with an estimated 70% of all policies affected. Based on these statistics there’s a reasonable chance your business could be one of them.  

Due to combination of factors – and often simply because they’re so busy doing other things – many underinsured New Zealand businesses don’t even realise. However there are also those who do so knowingly, taking a strategic approach to deliberately underinsure to lower their premiums. This is a dangerous game, because in many cases partial cover levels will only lead to partial payouts. 

For example, you may choose to insure your business equipment for $100,000 despite the fact it’s actually worth $200,000If a fire was to cause $50,000 damage (i.e. 25% of the total value), your insurer may be quite legally able to reduce your payout in proportion to your level of underinsurance – meaning you’d only receive $25,000. The rest you’d be forced to wear out of your own pocket potentially crippling your cash flow, if not your entire business. 

One of the biggest challenges with underinsurance is correctly assessing how much insurance you actually need. It’s a far more complex task than most small businesses realise. Building, demolition and replacement costs are constantly changing (usually upwards), meaning policies can often be out-of-date surprisingly quickly. Nowadays most insurers provide calculators on their websites to help, but without question the most prudent approach is to engage the services of an insurance specialist whose job is to know these things and make certain you’re not exposed. 

Some of the more common underinsurance traps an insurance expert can help you avoid include: 
  • Underestimating the total repair/rebuilding costs of damaged buildings 
  • Underestimating the costs associated with removing debris and any necessary site preparation works 
  • Not allowing adequately for architectural, engineering and regulatory fees 
  • Undervaluing the replacement costs of plant and machinery 
  • Failing to increase your level of cover to keep pace with inflation 
  • Inadequate levels of business interruption insurance 
  • Being unaware of the full limitations and exclusions on your policy in terms of your business assets and/or specific loss events. 

Granted, business insurance isn’the most exciting of subjects and it can be very tempting to put it off. But it’s vitally important you don’t. Ultimately, any underinsurance shortfall could severely impact your business liquidity and personal cash flow in the event of a loss event.  

Insurance Advisernet , February 21 2018

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