What is the real cost of being underinsured?


Article by Joe Zammit, Gow Gates


Many businesses can be considerably affected by underinsuring and underestimating the potential impact of their business risks. Such impacts can cost the security of the businesses future.


What is underinsurance?

Underinsurance is when a business does not have adequate insurance to cover the cost of loss, damage, business disruption or legal liabilities. This can unfortunately lead to the increased risk of a business having to close if something goes wrong.


What are the risks associated with underinsurance?

There are many threats that can endanger a business that does not have the right insurance coverage, these include:

  • Financial impact – It is very difficult for you to financially recover from unexpected events.
  • Legal action – Customers, clients and employees can take action on your business, and lawsuits are financially draining without the right insurance.
  • Reputation damage – Your business may not have the right coverage to assist in the payout of customer/client complaints.
  • Loss of business – Catastrophic events can damage equipment and property, directly affecting your business productivity and ultimately profit without appropriate cover.
  • Non-compliance –In some cases the law requires you to have insurance coverage. If your business doesn’t have insurance in place you could be at risk for penalties and fines.

It is common for business owners to misjudge the reinstatement or replacement costs of their business assets, after a destructive event. If the sum insured doesn’t reflect an up to date reinstatement or replacement cost, owners will be underinsured and face significant expenses when needing to make a claim. Your insurance policy may contain an average clause (commonly also known as a co-insurance clause). This means that you must insure for the full value in line with the policy terms and conditions. If you are under-insured your claim may be reduced in proportion to the amount of under-insurance.


Small business owners regularly try to save money by looking to minimise the cost of insurance premiums. Online insurance options make it easy to identify the cheapest policy, but typically the lower the premium the narrower the cover. Meaning that the cheaper option may open your business up to increased risks.


What difference does insurance make?

For the majority of business owners, their business is their entire livelihood. Developing an insurance policy that fully meets the needs of a business is crucial.


Type of Cover Scenario With Insurance Without Insurance
Business Interruption A timber yard  is severely damaged during a major electrical storm causing fire. The business is forced to close for three months of repairs.


The owner’s Business Interruption insurance can cover the amount of lost income while the business is closed. The business loses three months of revenue and struggles for weeks afterwards to generate enough profit to make up for the lost income.
Professional Indemnity An architecture firm provides a flawed design, and the building then needs to be demolished and rebuilt from scratch. The client sues the architect for these costs.


The firm has Professional Indemnity Insurance which can cover this amount, plus most legal costs. The firm can’t afford to cover the costs and is forced to go into liquidation.
Property A community organisation is targeted by vandals, who break a window to enter the building and steal computers. With Property Insurance cover, the organisation is able to repair the damage and replace the computers with new ones. The organisation doesn’t have enough cash to pay for the repairs and replacement computers and has to close down.


Management Liability A marketing agency terminates the employment of a worker, on the grounds that he engaged in serious misconduct. He sues for unfair dismissal and is awarded a large payout.


The agency can be covered for the damages and most legal costs by Management Liability insurance. The directors of the agency have to sell the company to fund the payout.


How can Gow-Gates help?

TABMA’s partner Gow-Gates do the hard work to protect your business with the level of insurance that is right for you, to help you continue to operate smoothly, even if the unexpected happens.

We review your insurance strategy, adapt your cover as your business changes and give you peace of mind that your business is properly insured.

Our team of expert professionals can tailor a competitively priced policy to protect against the major risks your business faces.

If you are uncertain about your current insurance policy or have questions about your cover, please don’t hesitate to us.


Joe Zammit


T: 02 8267 9949

M: 0408 802 730