Many small business owners know what keeps them awake at night.
It may be a fire, a flood, a cyber attack, equipment failure, a workplace accident, a legal claim, theft, a key staff member leaving, or the possibility of being unable to trade for an extended period.
But knowing the risk exists is not the same as being properly protected from it.
Across Australia, many small and medium-sized businesses may be underinsured, uninsured for certain risks, or unclear about what their policies actually cover. This can become a serious problem when something goes wrong.
What Is Underinsurance?
Underinsurance occurs when a business has insurance, but not enough cover to properly respond to a major loss.
This may happen if:
- The sum insured is too low
- Stock levels have increased but the policy has not been updated
- Equipment values are outdated
- Building or fit-out costs have risen
- Business revenue has grown but business interruption cover has not been adjusted
- New services, locations or activities have been added
- The business assumes a risk is covered when it is not
- Optional covers were declined to save money
- The business has not reviewed its policy for several years
In simple terms, underinsurance means the business may only discover the gap after a claim.
Why Small Businesses Become Underinsured
Underinsurance is rarely intentional. In many cases, business owners are busy running the business and insurance is only reviewed at renewal time, often quickly and under cost pressure.
Common reasons include:
- Rising costs of materials, labour and rebuilding
- Higher stock values
- New machinery, tools or equipment
- Business growth
- New staff or contractors
- Additional locations
- Changes to online trading or digital systems
- More reliance on suppliers or logistics
- Cost-cutting during difficult trading conditions
- Misunderstanding what the policy covers
- Assuming all business insurance policies are much the same
Vero’s SME Insurance Index has continued to identify underinsurance as a concern for small businesses, particularly as operating costs rise, stock levels change and business models evolve. Vero also notes that more than half of SMEs say they are not completely covered for all business risks.
This is where regular insurance reviews become important.
The Risks Businesses Often Worry About
Small businesses commonly worry about practical risks that could interrupt trading, damage assets or create major unexpected costs.
These may include:
- Fire
- Flood or storm damage
- Theft
- Equipment breakdown
- Being unable to trade
- Cyber attacks
- Workplace accidents
- Customer or third-party injury
- Legal claims
- Employee dishonesty or fraud
- Damage to stock
- Damage to commercial vehicles
- Loss of key suppliers
- Professional mistakes or advice-related claims
Vero’s research into SMEs’ top risk concerns and protection gaps provides further insight into the risks Australian businesses are most concerned about and where gaps in protection may remain.
Some of these risks may be insurable. Others may require a combination of business and commercial risk insurance, risk management, contracts, safety procedures, cyber security and business continuity planning.
Business Interruption: A Common Gap
One of the most important areas to review is business interruption insurance.
If a business suffers property damage from an insured event, repairs may take weeks or months. During that time, the business may lose income while still needing to pay ongoing expenses.
Business interruption insurance may help with loss of income after certain insured events, depending on the policy.
It may be relevant if a business is affected by:
- Fire
- Storm damage
- Flood damage, where flood is covered
- Damage to commercial premises
- Machinery breakdown
- Loss of access after a nearby insured event
- Damage to key equipment or stock
However, business interruption cover can be complex. The indemnity period, gross profit calculation, wage cover, policy triggers and exclusions all matter.
A business owner should ask:
- How long could we survive without normal income?
- Would repairs or rebuilding take longer than expected?
- Could we trade from another location?
- Would staff still need to be paid?
- Are our revenue and gross profit figures up to date?
- Is the indemnity period long enough?
For many businesses, the interruption to income can be more damaging than the physical damage itself.
Cyber Risk: No Longer Optional to Consider
Cyber risk is another area where small businesses can be exposed.
Many businesses now rely on email, websites, cloud software, online banking, customer databases, booking systems, accounting platforms and digital payment systems.
A cyber incident may involve:
- Ransomware
- Phishing
- Business email compromise
- Invoice redirection
- Data breaches
- Website disruption
- Stolen passwords
- Malware
- Unauthorised access to customer information
Recent auDA research into the cyber security mindset of Australian small businesses found that many small businesses still underestimate their cyber exposure. It reported that one in three small businesses think they are too small to be targeted, while 92% hold personal or sensitive data and only 26% feel confident they can protect it.
Cyber protection insurance may help with certain costs after a cyber incident, depending on the policy. These may include incident response, forensic investigation, data recovery, business interruption, legal advice, customer notification and crisis management.
Cyber insurance should sit alongside practical cyber security measures, including multi-factor authentication, secure backups, staff training and software updates. The Australian Cyber Security Centre’s Small Business Cyber Security Hub provides practical guidance to help small businesses improve their cyber security.
Equipment Breakdown and Machinery Risk
For many businesses, equipment is essential to daily operations.
This may include:
- Refrigeration units
- Ovens and hospitality equipment
- Manufacturing machinery
- Tools and trade equipment
- Pumps
- Air conditioning
- Farm machinery
- Medical equipment
- Computers and servers
- Workshop equipment
- Lifts, compressors or motors
If key equipment fails, the business may be unable to operate normally.
Equipment breakdown cover, machinery breakdown cover or related policy sections may assist in some circumstances, but cover varies between insurers and policy types.
Business owners should check:
- Which equipment is covered
- Whether breakdown is included or optional
- Whether deterioration or wear and tear is excluded
- Whether there are age limits or maintenance conditions
- Whether business interruption from breakdown is covered
- Whether temporary hire costs are included
The more dependent a business is on equipment, the more important this review becomes.
Fire, Storm, Flood and Natural Disaster Risks
Property damage remains a major concern for many Australian businesses, particularly in regions exposed to storms, floods, bushfire or severe weather.
For businesses across Queensland and Northern NSW, recent years have shown how quickly weather events can affect local communities, roads, premises, stock and supply chains.
Commercial property insurance may help cover damage to buildings, contents, stock, fixtures, fit-out or equipment, depending on the policy.
However, business owners should pay close attention to:
- Whether flood cover is included
- How storm, flood and water damage are defined
- Whether debris removal is included
- Whether stock is insured at the right value
- Whether outdoor property, signage, fencing or sheds are covered
- Whether temporary premises or increased cost of working is covered
- Whether business interruption applies after an insured event
Insurance affordability has also become a challenge for some regional businesses. Recent reporting has highlighted that rising premiums may lead some businesses to reduce cover or go without insurance, increasing the risk of underinsurance.
Liability and Legal Risks
A business may also face claims from customers, suppliers, employees, contractors or members of the public.
Depending on the business, relevant insurance may include:
- Public liability insurance
- Product liability insurance
- Professional indemnity insurance
- Management liability insurance
- Employment practices liability
- Statutory liability, where available and legally insurable
Examples of liability risks may include:
- A customer slipping and injuring themselves on the premises
- Damage caused to someone else’s property
- A product causing injury or loss
- Advice or professional services leading to financial loss
- Employment-related claims
- Director or management decisions being challenged
Westlawn’s business insurance services include options for public liability, professional indemnity and other commercial liability risks.
The right cover depends on the business structure, services, contracts, industry and risk profile.
Misunderstanding Cover Can Be Costly
One of the biggest insurance risks for small businesses is assuming cover exists without checking the policy.
Business owners may assume:
- Business interruption is automatically included
- Cyber crime is covered under general business insurance
- Flood is included under storm cover
- Tools in vehicles are fully covered
- Employee theft is covered under theft insurance
- Equipment breakdown is the same as accidental damage
- Public liability covers professional advice
- A landlord’s building insurance covers the tenant’s stock or fit-out
- Online scams are covered under cyber insurance
Sometimes these assumptions are wrong. Sometimes the cover exists but only up to a limit, or only if certain conditions are met.
This is why reviewing the policy wording, schedule, exclusions and optional covers is important.
Why Using an Insurance Broker Can Help
Insurance can be difficult to compare because policies are not identical.
An insurance broker can help a business owner:
- Understand the risks the business faces
- Review existing cover
- Identify possible gaps
- Explain policy limits and exclusions
- Consider business interruption needs
- Review sums insured
- Compare available options
- Help with claims support if something goes wrong
Vero’s SME Insurance Index content also notes that businesses using brokers are more likely to be covered and have a plan in place for a major negative incident.
Westlawn’s insurance broking and claims support can help businesses understand their cover and navigate the claims process when something goes wrong.
This support can be particularly valuable when a business changes, grows, adds staff, buys new equipment, moves premises, stores more stock or expands online.
When Should a Business Review Its Insurance?
A business should not only review insurance at renewal time.
It is worth reviewing cover when:
- Revenue changes significantly
- Stock levels increase
- New equipment or vehicles are purchased
- The business moves premises
- A lease is renewed or changed
- New staff or contractors are engaged
- New services or products are added
- The business starts selling online
- Cyber exposure increases
- The business takes on larger contracts
- Building, fit-out or replacement costs rise
- The business has experienced a claim or near miss
Small changes can create large insurance implications.
Business Insurance Review Checklist
Business owners can start by asking:
- Are our sums insured up to date?
- Is business interruption cover included?
- Is the indemnity period long enough?
- Are stock and equipment values accurate?
- Do we have cyber insurance?
- Are tools, vehicles and mobile equipment properly covered?
- Do we understand our flood, storm and fire cover?
- Are public liability limits suitable?
- Do we need professional indemnity or management liability cover?
- Are exclusions clearly understood?
- Have we told our broker about changes in the business?
- Do we have a business continuity plan?
- Do we know what to do if we need to make a claim?
If the answer to any of these is unclear, it may be time for a review.
Talk to Westlawn Insurance Brokers
Many small businesses worry about the right risks, but not all have the right cover in place.
Westlawn Insurance Brokers can help business owners review their insurance and identify possible gaps across business interruption, commercial property, cyber protection, public liability, professional indemnity, management liability, commercial motor and claims management.
Westlawn Insurance Brokers supports businesses across Grafton, Casino, Lismore, Robina, Coffs Harbour, Ballina, Walcha, and surrounding areas.
To speak with a Westlawn Insurance broker, contact the team today.
Call: 1300 937 852
Email: insurance@westlawn.com.au
General advice only. This article does not take into account your personal circumstances, objectives or needs. Cover is subject to the terms, conditions, limits and exclusions of the relevant policy. You should review the relevant Product Disclosure Statement and Target Market Determination and speak with a qualified insurance professional before making decisions about insurance.