Avoid the Pitfalls of Underinsurance: A Guide for SMBs

Every day, the owners and employees of small and midsize businesses (SMBs) pour their hearts and energy into building their companies. However, a common threat could put their businesses at risk: being underinsured. According to the 2023 Hiscox Underinsurance in Small Business report, 75 percent of U.S. small businesses do not carry sufficient insurance coverage, potentially leaving them exposed to more risk than they realize.

 “That means being underinsured has a direct impact on the bottom line,” says Tyler Peterson, senior vice president, head of professional risks at Hiscox.

One of the prime causes of underinsurance is widespread insurance illiteracy. Business owners simply do not realize the role of insurance in protecting–and growing–their business. According to Hiscox’s research, 71 percent of business owners cannot accurately define a business owners policy, while 83 percent cannot describe a general liability policy. (If these terms have you scratching your head, too, fear not–we describe them below.)

Further exacerbating the underinsurance epidemic is small business owners’ tendency to take a “set-it-and-forget-it” approach to insurance rather than reevaluating as their business grows and adjusting their coverage, Peterson explains. Understanding the causes of underinsurance can help your business right-size its approach so you can protect your business and capitalize on the opportunities proper coverage creates.  

The core four policy types

Insurance is both a defensive mechanism and an offensive strategy, Peterson says. Properly insured business owners have peace of mind that they are financially protected should an unexpected event occur. Policy holders also gain access to specialized claim handlers who mitigate damage and bring in external resources, such as lawyers, to secure the best outcome possible. Insurance is an offensive strategy because customers with adequate insurance can take strategic risks with confidence, knowing they have the financial security of an insurance policy in place. Many large companies require vendors to have insurance, so coverage can enable SMBs to compete for and win new contracts, as well.

While every company’s insurance needs differ, business insurance programs should generally include four core coverages:

• A general liability (GL) policy to protect businesses against claims that result from damage or injury that occur during the business’s operations. Two-thirds of small businesses have a GL policy, according to the Hiscox survey.
• Property insurance to cover the costs of damaged or lost property, including tools and technology, like cellphones and laptops, A business owner’s policy (BOP) is a combination of general liability and property insurance. Hiscox recommends all SMBs have a BOP.
• Cyber insurance to cover privacy, data, and network exposures and protect against cyber threats, which are on the rise for small businesses.
• Professional liability insurance to protect businesses that provide advice to clients. Hiscox’s research finds that only 32 percent of SMBs that should have Professional Liability insurance do. The rest are unprotected in the event they are sued for negligence, which can happen even if a company doesn’t make a mistake.

How to create an insurance strategy

To ensure your company obtains appropriate insurance, Peterson suggests the following steps:

• Think about the business risks that keep you up at night. This may be an indicator that you’re carrying too much exposure in these areas and should examine how insurance coverage can protect your business.
• Work with an insurance broker, and be honest, sharing the good, bad, and ugly about your business and its operations. “That way, they can help you get protection against the bad and ugly parts, too,” Peterson says.
• Evaluate your insurance at least every two years or as part of your business planning process, as well as when revenues increase or decrease by 20 percent. This ensures you are not leaving your business exposed or paying for insurance you no longer need.  “Small business owners, at least the ones that I know and have had the privilege of working with, are always thinking about where they’re going to take their business,” Peterson says. “They need to be thinking about their insurance program as a critical part of their risk management and business planning process when they’re thinking about that next step.”

The more you know about insurance, the better you can avoid underinsurance pitfalls. To learn more, visit the Hiscox Small Business Resource Center.