Commercial Insurance Gaps: Common Coverage Mistakes Businesses Make
Although many business owners buy commercial insurance with the hope that they will have full protection once they have a policy in place. However, gaps in coverage are among the leading causes of denied or partial payout of insurance claims. Gaps in coverage occur for various reasons, but more often than not, they occur due to an owner’s lack of understanding of how insurance coverage works or a failure to update the policy as the business grows and develops over a period of time. Identifying and correcting these problems early can protect your business from the financial and operational consequences.
One of the most common reasons for a coverage gap is when an owner fails to adjust their policy limits as a result of the company’s growth. As a business’s revenue grows, so does the number of employees; they grow and develop their business, and purchases for equipment, supplies and new services will increase as well. When this occurs, the owner may find that they have not adjusted their policy to reflect this increase in value, giving rise to a potential discrepancy between the amount of liability coverage purchased in the past and what they may need for the future. In a claim where there is a need to pay a claim and the limits of coverage have not been updated for many years, the owner’s current policy may not provide sufficient coverage for that claim.
A lot of people make a common mistake when they underestimate the amount of liability risk associated with their business. Some businesses only carry the minimum Commercial General Liability Insurance limit, thinking that it will provide enough cover if they need it. Unfortunately, the amount that businesses must pay out for legal fees, medical bills and settlements has increased significantly over time. A slip-and-fall injury, a car accident, or an injury caused by a product, for example, may have a total cost that exceeds the typical limits set by insurance companies, and so a business can be liable for amounts greater than those limits. If a business has not purchased enough liability insurance and an umbrella policy, it may be necessary for the business to pay the difference in cash.
Another common mistake is having a property insurance gap due to underestimating the actual replacement costs of their physical assets. Instead of (or in addition to) insuring their physical assets at their actual replacement cost, many businesses insure their assets at “market value”. The market value is what a property could be sold for, whereas the replacement cost is the amount it would take to rebuild the property in the event of a loss.
Given the increase in construction costs and delays due to supply chain disruptions, the cost to replace damaged assets may end up being considerably higher than anticipated. If a business does not carry enough insurance to cover the replacement value of its assets, it may be penalised by its insurance company through co-insurance penalties, in turn, resulting in a lower payout.
Business Interruption insurance coverage is also an area where businesses often have coverage gaps. Many business owners assume that if their physical assets are damaged, they will be compensated for the loss of income during that time. This is not the case, as business interruption coverage needs to be specifically tailored based upon accurate income figures and the number of days the business is unable to operate due to the loss of physical property. If insurance ratings are too low or there are insufficient coverage terms for your business activities, you may have difficulty obtaining reliable coverage at the time when you need it most. If your company relies on specialised equipment (for example) or has an extended time frame for rebuilding or reestablishing itself, it could be very costly as you attempt to replace lost equipment, hire employees back, etc.
While non-technical businesses may feel they don’t have a need for cyber insurance, the fact of the matter is that most non-technical businesses operate with sensitive information about their customers, including credit card numbers, payroll information, vendor payment information, and so forth. As a result, a cyber incident such as a “ransomware” attack, phishing scam, or data breach can affect any industry. Without cyber insurance, your business may be liable for many different types of expenses, including system recovery costs, the cost of defending against legal claims made by victims of cyber incidents, and the cost to mitigate damage to reputation.
The “Set It and Forget It” approach, or simply ignoring your insurance after you purchase it, is also a contributor to coverage gaps because businesses grow through the years, through risk evolution, and through changing insurance markets. Businesses need to regularly evaluate their operations, assess risk, and communicate with their insurance broker to ensure their insurance continues to meet their real-world exposures.
At A-Kan Insurance, we work with our clients to identify any gaps in their insurance program by reviewing their day-to-day operations as well as contracts, assets, and future planning. We customise our clients’ insurance plans to continue to evolve as their businesses grow. Having commercial insurance is much more than simply having a policy; it is about having the right commercial insurance in Alberta when you need it most. Get a quote today.