Operating a business is always associated with some degree of risk: a changing market, physical damage, legal suits, cyber attacks- and the list goes on! This is the reason why business insurance is there: to serve as your financial cushion when the unforeseen occurs. Nevertheless, what most business owners are not aware of is that being underinsured is just as risky as not being insured at all.
In fact, a 2023 survey by the Insurance Regulatory and Development Authority of India (IRDAI) revealed that 6 out of 10 small and medium enterprises (SMEs) in India were underinsured. This implies that in case of a huge loss, such businesses would be compensated partially- compelling many to shut down permanently.
So, how do you know whether your business is underinsured or not? In this blog, we will go through six obvious red flags of underinsurance and how you can address them before a crisis strikes you.
Let’s get going then!
1. You Have Not Reviewed Your Insurance coverage for Years.
Your business does not exist in a vacuum but rather it develops, transforms and adapts with time. You might have acquired new equipment, employed new staff or even opened new branches. Yet, a lot of entrepreneurs forget to update their insurance policies accordingly.
When your insurance has not been reviewed for two or more years, chances are that it no longer suits your present requirements. To illustrate, in case the value of your property has gone up or in case you have acquired new equipment, your current policy may not cover your new assets entirely.
Failing to review your policy regularly can leave large coverage gaps that only become evident during a claim. Imagine discovering after a fire that your warehouse is insured for ₹50 lakh when its current replacement cost is ₹80 lakh—you’d only be compensated proportionally.
Not conducting a review of your policy on a regular basis may leave huge coverage gaps that are not discovered until you make a claim. Think about it; you encounter a fire incident and find out that your warehouse is insured [for ₹50 lakh when its replacement cost has now gone up to ₹80 lakh. In this case, you can only receive a proportionate compensation.
What you should do: Get your insurance reviewed on a regular basis, preferably once a year, with your insurance provider or broker. It is a process that should be part of your financial planning. It is important to update your policy on a regular basis so that your coverage increases with your business.
2. The Value of Your Property or Asset Has Gone Up but Not Your Coverage
The value of your assets is influenced by inflation, the appreciation of the market and the growth of the business. The cost to replace equipment, repair buildings, or restock inventory rises every year. Unless your insurance is updated to reflect the current replacement costs, you are at risk of being underinsured.
As an example, suppose your office house was valued at ₹1 crore five years ago. Today, rebuilding the same property would be around ₹1.4 crore, thanks to inflation and increase in construction cost. Considering your insurance still covers it at the old value, you will only receive partial compensation in case of a loss – usually using what is referred to as the “average clause”.
This clause penalizes underinsured businesses by reducing claim payouts proportionally to the shortfall in coverage. It would imply that in case you are only insured at 70 percent of the true value of your asset, you only get 70 percent of your claim.
What you should do: Re-assess the sum insured for all your assets which may include buildings, equipment, vehicles and inventory at least once in a year. Think about hiring professional valuation services that can calculate the right replacement costs. It will increase your current premium if you want to increase the sum insured but ,it will save you from financial losses in the long run.
3. You are Missing Important Types of Insurance Policies to Sync with Modern Business Risks
Several business owners assume that a simple property or fire insurance policy will cover every risk that is likely to occur. Sadly enough, that is not the case. The contemporary business environment is extremely vulnerable to numerous threats such as cyberattacks, disruptions in supply chains, and management liabilities, which need specialized insurance coverage.
The following are some of the key policies that a company may lack in their portfolio:
- Cyber Insurance: Protects against data breaches, ransomware attacks, and digital fraud.
- Directors & Officers (D&O) Insurance: Covers top executives of an organization against legal claims of mismanagement or negligence.
- Business Interruption Insurance: Compensates for lost income when operations are halted due to disasters.
Without these coverages, your business could be exposed to devastating financial consequences. For example, a single cyberattack can cost an Indian SME an average of ₹30–40 lakh in recovery expenses, according to CERT-In reports.
What you should do: Consult a professional insurance advisor who understands your industry. They can help you identify hidden vulnerabilities and suggest policies that fit your unique risk profile. It’s not about buying more insurance—it’s about buying the right insurance.
4. You are Relying Only on a Standard or Basic Policy
Many small business owners start out with a standard insurance package that includes fire, theft, and property coverage. While this provides basic protection, it often overlooks specialized risks that can cripple your operations.
For example:
- Machinery Breakdown Insurance covers damages from equipment failure—a must for manufacturers and factories.
- Crime Insurance protects against employee fraud or theft.
- Marine or Transit Insurance covers goods in transport.
- Office Package Policies combine multiple protections for corporate setups.
If you rely solely on a basic plan, you’re leaving critical gaps uncovered. Even minor incidents—like an internal data breach or a machinery failure—can disrupt production and drain profits.
What you should do: Don’t treat insurance as a one-size-fits-all product. Customize your coverage by adding policies that align with your business model. This approach ensures holistic protection and prevents nasty surprises during claim time.
5. You have Expanded Operations or Hired More Staff
Growth is exciting—but it also increases your exposure to risk. Opening new offices, hiring more employees, or adding new product lines means you’re taking on more responsibilities and liabilities. Yet, many business owners forget to expand their insurance coverage accordingly.
For instance:
- New warehouses or offices require property or fire insurance.
- A growing fleet of vehicles calls for commercial vehicle insurance.
- More employees necessitate group health insurance or workmen compensation policies.
Unless these operational changes are reflected on your coverage, your business will be left without protection in vital areas. Just to give an example, when an accident happens at a non-insured facility or when it happens to an employee who has not been listed, your insurer can refuse to pay the claim.
What you should do: You should review your insurance portfolio every time your business is undergoing a significant change such as expansion, mergers, or hiring. Contact your insurer to inform them of any new changes in order to have your policies updated. Proactive communication avoids claim disputes in future.
6. You Do Not Completely Understand What Your Policy Covers (or Excludes)
Misunderstanding the policy terms and conditions is perhaps the most common reason behind being underinsured. Most business owners believe that they are covered “for everything” before they realise the existence of exclusions and sub-limits while filing a claim.
Insurance contracts are usually accompanied by small print stating what is covered, what is not covered and to what extent. As an instance, your Fire Insurance Policy may not cover losses caused by short circuits unless stated explicitly. Or your Cyber Insurance Policy may not cover social engineering frauds unless you have bought an add on.
This ambiguity can prove to be catastrophic during a crisis situation. One misinterpretation can spell the distinction between a full payout and a claim rejection.
What you should do: You ought to take time to read and comprehend your policy documents. When you do not understand something, request your insurer or advisor to clarify. Concentrate on exclusions, deductibles, waiting periods and limits of each section. A well informed business owner is much better safeguarded than one relying on assumptions.
Treat insurance as a living, evolving strategy—one that keeps pace with your business and does not lag behind it.
What to Do If You Discover Your Business Is Underinsured
Realizing that your business is underinsured can be unsettling—but the good news is, it’s fixable. Here’s how you can correct it before a crisis strikes:
- Conduct a Comprehensive Risk Assessment: List all potential risks—from property damage and legal liabilities to data breaches and business interruptions.
- Revalue Your Assets: Use current market or replacement costs to determine accurate insurance sums.
- Identify Missing Policies: Check if you have coverage for modern risks like cybercrime, employee fraud, or director liability.
- Work with a Trusted Insurance Advisor: Experts can identify gaps you might overlook and help customize a protection plan.
- Review Policies Annually: Make it a standard practice to reassess your coverage each year or after major changes in your business.
Treat insurance as a living, evolving strategy—one that grows with your business rather than lagging behind it.
Final Thoughts:
Underinsurance is a silent menace that most businesses find out too late. You might be paying annual premiums, believing that you are safe only to find out that you have been insured way below what you actually require.
The cost of underinsurance is not only monetary terms but it also puts in the risk of losing years of hard work, customer confidence, and stability of the business. However, with frequent reviews, correct valuation, and extensive cover, you can be assured that your insurance is there to cover you when you need it the most..
IIn business, crises aren’t a matter of “if” but “when”. The question is- will your insurance be ready, when that ‘D-day’ comes?
Take action today. Review your policies, seal the loopholes and secure your business against uncertainty. The right insurance is not merely a safety net, but it is the very foundation of survival and growth over a long period.
At BimaKavach, we provide reliable and customizable insurance solutions designed to safeguard your business from unexpected financial setbacks. We thrive in meeting the unique needs of businesses at every stage and empowering them with unwavering support. We will help you obtain the right, yet the most comprehensive coverage and absolute peace of mind- so that you can focus more on growth, while these policies handle the risks unique to your business.
