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The Underinsurance Trap

Many small business owners take out insurance, renew it each year, and assume they’re protected. But rising costs mean that for some businesses, cover that once looked right is no longer enough. This is known as underinsurance, and it’s becoming more common.

Underinsurance happens when the amount you’ve insured is lower than the real cost of rebuilding, repairing, or replacing what your business relies on. That could include your premises, stock, equipment, fixtures, or specialist tools.

If you need to make a claim and your sums insured are too low, the insurer may reduce the payout, even if the claim itself is valid. This can leave you funding part of the loss at exactly the moment cash flow is under pressure.

Why underinsurance catches businesses out

Underinsurance is rarely deliberate. It usually creeps in over time:

Rising costs
Build costs, materials, labour, stock prices and supply chains have all increased. If your policy values haven’t kept pace, the gap can be significant.

Automatic renewals
Renewing on last year’s figures can feel convenient, but it assumes nothing has changed, which is rarely true.

Business changes
Growth, new services, extra equipment, more staff, or higher turnover can all increase your exposure without being reflected in your cover.

Trying to keep premiums down
In tough trading conditions, some businesses reduce limits to save money, without realising the impact this can have on a claim.

 

Self-check

5-Question Underinsurance Self-Check

Answer honestly. Your score updates instantly.

1️⃣ Have you reviewed your insurance values in the last 12 months?

If it’s been over a year, your cover may not reflect today’s rebuild, replacement or labour costs.


2️⃣ Are your sums insured based on current replacement costs?

Rising material, equipment and stock costs mean historic values often fall short.


3️⃣ Has your business changed since you last arranged your cover?

(For example: higher turnover, new services, more staff, new equipment, online sales)



4️⃣ Do you know how long your business could realistically be unable to trade after a serious loss?

Business interruption is one of the most common underinsurance gaps.


5️⃣ Do you know what isn’t covered by your policy?

Surprises usually appear at claim stage, not renewal.


Score: 0/5
Answer the questions to see your result

Call 020 3883 7976

This self-check provides general information, not advice. Cover depends on your business and your policy terms.

 

The real cost of being underinsured

Underinsurance doesn’t just affect large losses. Even smaller claims can be reduced if the insurer applies an “average” clause because the business was insured for less than its true value.

In practice, that can mean:

  • Only part of a valid claim is paid.
  • Delays to reopening.
  • Unexpected bills at the worst possible time.

For some businesses, that shortfall is the difference between recovery and closure.

How to avoid the underinsurance trap

A few simple steps can make a big difference:

  • Review your sums insured regularly, at least once a year, and whenever your business changes.
  • Use realistic, up-to-date values for buildings, contents, stock and equipment.
  • Check business interruption cover, especially how long you could realistically be unable to trade.
  • Ask for help, insurers and brokers can support valuations and sense-check limits.

Insurance works best when it reflects today’s costs and today’s risks, not yesterday’s figures.

If you’re unsure whether your cover still stacks up, a review with an FSB Insurance Service broker now can help prevent unpleasant surprises later, when it matters most.

Want an expert perspective? The ABI’s SME Insurance Guide

If you’d like a clear, impartial overview of what business insurance is for, what’s required by law, and how underinsurance happens, the Association of British Insurers has published a short, practical guide for small businesses.

The SME Insurance Guide (January 2026) explains, in plain English:

  • The difference between being uninsured and underinsured
  • Which types of insurance are legally required
  • Why claims can be reduced when cover limits are too low
  • How to check whether your sums insured are realistic
  • Why regular reviews matter as costs and businesses change

It’s designed for business owners, not insurance specialists, and is useful whether you buy cover directly, through a comparison site, or with an adviser.

👉 Read the ABI SME Insurance Guide

This content is for general information only and is not intended to provide advice or a personal recommendation. Insurance cover is subject to the terms, conditions, and exclusions of the policy. Always consider your individual circumstances and seek professional advice before arranging insurance. External websites are not under our control and we are not responsible for their content.