Small businesses may be at risk of insurance coverage gaps due to inflation, leading to a potential ‘serious financial crisis’ according to SME insurance service BizCover’s head of product, channels and risk Jane Mason, who has urged owners to review their policies to avoid being caught out.
Losses due to storms, fires and other significant events could result in insurance claim payouts that don’t cover the total cost of replacement due to the difference between what the business has insured and the cost to rebuild.
“What was the right cover one year may not be enough cover now because of the rising cost of materials,” says Mason.
“The effect inflation has on replacement costs cannot be overstated. Aussie businesses could be left with a serious financial crisis by not having enough coverage to cover your loss.”
According to Mason, even as data suggests inflation has likely peaked in Australia, the remnants of double-digit inflation growth for construction input costs to reach all-time-high levels could still leave small business owners with significant holes in their business insurance.
Specifically, the BizCover representative pointed to major inflationary pressures adding to building costs peaking mid-2022 for prices of staples like steel (which rose in price by 42.1 per cent), board and joinery (up 20.6 per cent) and glass (14.1 per cent).
According to property data business CoreLogic, the overall price of building construction rose by close to 12 per cent over the course of 2022, meaning if one insured a building in December ’21 the cost to replace that building may be dearer than planned.
This is an issue because, as BizCover explains, insurers typically pay to repair, rebuild or replace damaged property to the state it was in when insured, though some may offer to cover 120 per cent of the total insured amount to account for changes in replacement costs.
For example, if you insured your business for $1 million last year and a fire destroyed it, but the cost to rebuild has gone up to $1.2 million since then, the insurer would typically pay for the additional $200,000 if they offer 120 per cent coverage. But if they only cover up to the insured amount ($1 million), you may have to pay the remaining $200,000 out of pocket.
“It's critical for small business owners to know how much they’re covered for because events like these can be very expensive,” says Mason.
“Even if your building is totally destroyed and needs to be rebuilt, if the cost to replace it has gone up due to inflation, there may be a gap between what's covered and what you'll need to pay.”
The insuretech recommends business owners regularly assess their exposure to risks and ensure that they have sufficient coverage for the current value of their assets, which can significantly reduce coverage gaps.
“It’s important to insure your business for an amount that is sufficient to cover not only the tangible assets, but the cost of repairs and any other variables that might leave you out of pocket,” Mason adds.
“Consider jumping online to compare quotes so you could then decide whether the price of the cover justifies the protection.”
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