First of all, what is underinsurance?

Underinsurance occurs when your insurance coverage is not enough to fully cover the potential losses you may face. For example, if your business is insured for $500,000 but the potential losses you could face are $1 million, you are underinsured.

So why does underinsurance matter?

In the event of a loss, underinsurance can leave your business vulnerable. If your coverage isn’t enough to fully cover your losses, you’ll be left to pay the difference out of your own pocket. This can be a major financial burden, especially for small businesses.

One way that underinsurance can occur is through the use of coinsurance clauses in insurance policies.

Coinsurance clauses require policyholders to carry a certain amount of insurance coverage, often expressed as a percentage of the value of their property. For example, a policy may require a policyholder to carry 80% of the value of their property as insurance coverage. If the policyholder doesn’t carry the required amount of coverage, they may be subject to reduced benefits or even denied coverage altogether.

Another way that underinsurance can occur is through the use of average clauses in insurance policies.

Average clauses are used to reduce the amount of insurance coverage provided to policyholders. An average clause in a business insurance policy might state that if the policyholder’s insurance coverage is less than the value of their property, the policy will only provide coverage up to a certain percentage of the value of the property.

For example, a policy may have an average clause that says, “If the value of your property is $500,000, but you only carry insurance coverage of $400,000, your policy will only provide coverage of 80% of the value of your property.” This means that in the event of a loss, the policyholder would only be eligible for up to $400,000 in insurance coverage, even though the value of their property is higher. This could result in the policyholder being underinsured.

Here are some tips:

• Review your insurance coverage regularly. It’s important to regularly review your insurance coverage to make sure it’s still sufficient to cover the potential losses you may face. You should also review your coverage whenever you make any major changes to your business, such as expanding your operations or purchasing new equipment.
• Understand coinsurance clauses and average clauses. Coinsurance clauses and average clauses can be confusing, so it’s important to fully understand what they mean and how they can affect your coverage. If you’re not sure about something, don’t hesitate to ask your insurance provider for clarification.
• Consider purchasing additional insurance coverage. If you’re concerned about being underinsured, you may want to consider purchasing additional insurance coverage. This can provide you with additional protection in the event of a loss.
• Shop around for insurance. Don’t just accept the first insurance policy you’re offered. Shop around and compare policies from different providers to find the one that best fits your needs.

Ultimately underinsurance can be a major problem for businesses.

By understanding what underinsurance is, how it can occur, and how to avoid it, you can help protect your business from the financial burden of being underinsured.