Underinsurance explained: Does your small business have the coverage it needs?


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For small business owners, ensuring you have adequate insurance coverage is a crucial aspect of risk management and business planning. While many small businesses may be well-insured, others may not realize they don’t have the full coverage they need.

Here are three situations small businesses may face that could lead to underinsurance, along with tips on how business owners can evaluate and adjust their insurance policies to better match their specific needs.

What is underinsurance?

Underinsurance occurs when a business holds insurance policies that fail to provide sufficient coverage to fully compensate for potential losses. This gap in protection often results in out-of-pocket expenses for the business and can lead to catastrophic financial strain in times of crisis.

How can underinsurance occur?

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Failure to regularly reassess your insurance: One major sign of potential underinsurance is not reassessing your business insurance regularly, or at least once every 12 months. Changes in market environments, such as high inflation and new building regulations, can potentially make your existing coverage inadequate. Alternatively, as your business grows and expands, your insurance needs may also change and evolve. An insurance policy that was sufficient during the early stages of your company might become inadequate as your business grows in size, value or operational scope. Without updating your insurance coverage to reflect these changes, your business may be at risk of being underinsured.

Example: When a café expanded its seating area and updated its kitchen equipment to cater to its growing clientele, the owner overlooked reassessing the café’s insurance policy. A fire occurs and causes damage to the café. Amidst rising inflation and new safety regulations, the existing coverage – while adequate at inception – now provides insufficient coverage for these new improvements, leaving the café vulnerable to significant financial loss.

Balancing costs with coverage: As a small business owner conscious about expenses, you might select a minimum necessary coverage with lower premiums to keep your costs down. While it may seem like a smart cost-saving decision at the time, selecting insurance coverage based on your willingness to spend rather than your unique business needs can leave your business vulnerable to a risk that, while perceived as unlikely, can have devastating financial consequences.

Example: A small town bakery located near a river opts for basic insurance to save costs, excluding flood coverage. After an unlikely flood event occurs (a roughly 1 in 20-year occurrence), significant repair costs can be financially devastating without insurance support.

Lack of awareness of insurance products: A recent survey conducted by Leger on behalf of TD Insurance found that only 59% of small business owners believe they have a strong understanding of the types of insurance specific to their business. Meanwhile, solopreneurs, compared to those with more than one employee, were more likely to admit that they have a weak understanding of the different types of insurance coverage options available. A lack of clear understanding in insurance coverage can lead to underinsurance, leaving businesses exposed to significant out-of-pocket expenses as a result.

Example: A clothing boutique owner uses their personal car for deliveries, assuming their personal auto policy covers commercial usage. However, a personal auto policy often contains exclusions for commercial activities, which may result in no payout if an accident were to occur.

Similarly, a massage therapist who operates from home with high-value massage tables, oils, linens or other equipment assumes their homeowner policy is sufficient to protect their home-based business. However, with lower coverage limits than a dedicated small business insurance policy, a standard homeowner policy may have insufficient coverage to repair or replace specialized business property in the event of loss. In addition, a homeowner policy would also fall short in offering business interruption insurance—which could compensate for lost income and extra expenses incurred if the business is temporarily shut down due to a covered event.

Steps you can take to address underinsurance

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To mitigate the risks of underinsurance, business owners should:

  1. Regularly review and update their coverage: As your business grows and changes – for example, as a result of a change in revenue, expanding locations, the purchase of a new vehicle, or extending your product and/or service offerings – it is crucial to inform your insurance provider to ensure any new risks are adequately covered.

  2. Obtain a professional property evaluation: Professional assessments can provide more accurate valuations, especially in changing economic environments, ensuring your coverage matches the true replacement or repair costs of your property.

  3. Consult with licensed insurance professionals: Seeking professional advice can help you assess your coverage needs accurately. Licensed Insurance Advisors can also suggest appropriate insurance products based on your specific risks.

  4. Understand your policy details: A thorough understanding of your policies, including exclusions and limits, is essential for effective risk management.

Underinsurance is a prevalent yet addressable issue for small businesses. By understanding the common scenarios that lead to underinsurance and taking proactive steps to ensure adequate coverage, business owners can increase their financial security and ensure their businesses are protected from unexpected events.

TD Insurance is committed to helping small business owners better understand their coverage options and create a plan that is customized to their business needs. To determine the coverage that’s right for you and your business, speak to a licensed TD Insurance Advisor or visit the TD Insurance for Business website for more information.

With customized coverage options tailored to your business needs, learn more about how TD Insurance can help your business get the protection it deserves.

The content on this page is for general information purposes only and does not constitute legal advice. Any coverages described herein may be subject to additional eligibility criteria, limitations and exclusions. In the event you make a claim, potential indemnification is also subject to the receivability of the claim and the type of coverage you bought.

In the case of conflict between the content on this page and your policy wordings, your policy wordings shall prevail. Please speak to an Advisor or consult your policy wordings for further details.



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