Underinsurance is a common but often overlooked issue that can have serious consequences for any business owner. This can leave you exposed to financial and operational risks in the event of a significant incident. So, how can you be sure you have sufficient coverage? In this article, we explore how your business may be underinsured, and provide examples of common areas where underinsurance can occur.
What is Underinsurance?
According to Hub International’s North American Outlook Report 2025, economic challenges and inflation have affected 81% of companies’ ability to secure enough insurance coverage. Underinsurance is when your business insurance coverage falls short of its actual needs. It occurs when the declared total value of assets (such as commercial property, buildings, and contents) and exposures fall below the real-time values. While this is often unintentional, it could usually occur due to not keeping policies up to date and not accurately assessing your business’s market value and potential risks.
Why are companies underinsured?
Commercial coverage for property, general liability and umbrella insurance have all decreased when compared to 2023. Several commercial clients cite a variety of reasons for being underinsured, stemming from economic challenges, inflation and increased insurance costs.
Factors that contribute to being underinsured
- Economic challenges: Economic challenges and inflation have made it difficult for many companies to secure adequate insurance coverage
- Insurance costs: Companies are under pressure to pay more for insurance, which can make it difficult to afford coverage.
- Newer businesses: Newer businesses are often underinsured, but they are also subject to fewer risks.
- Business area: Different types of businesses have different severity of risks.
- Industry cycles: Industry cycles can affect the availability and cost of insurance.
A recent study by Deloitte found that up to 25% of Canadian small businesses are underinsured or lack commercial insurance coverage completely.
Common Areas of Underinsurance
Property and assets: One of the most common areas of underinsurance, as many underestimate the value of their property, equipment, and inventory. In the event of a claim, you’ll be responsible for covering the shortfalls.
Business interruption: Business interruption insurance helps you cover lost income during disruptions. Many Canadian businesses are underinsured in this area, by as much as 40-60%!
Liability insurance: Liability insurance protects your business from legal claims. Underinsurance in this area can be particularly risky. If you’re sued for a sum that exceeds your policy limits, you may have to cover the additional expenses out of pocket.
Cyber insurance: While some overlaps exist between standard business insurance policies and cyber insurance, traditional insurance policies lack the depth and breadth of standalone cyber cover.
Plant, machinery and equipment: Just as property values fluctuate, so does the value of machinery. This is especially true if there are supply chain complications, or demand exceeding supply capabilities.
Consequences of Having an Underinsured Business
Understanding underinsurance means that you must understand the value of your business and its policy loss limits. Policy loss limits are the maximum amount of money an insurance company will pay out for a covered loss. Plainly put, if the value of your insured assets increases, you need to increase the sum insured. If you don’t raise the maximum amount your insurance will cover, your business might not get full compensation if a big loss exceeds that limit.
A recent study by Deloitte found that up to 25% of Canadian small businesses are underinsured or lack commercial insurance coverage completely. Business owners are busy and they value insurance products that are easy to understand, convenient and personalized, the Deloitte study says, giving insurance companies an opportunity to get their business.
What your Toronto business can face without insurance or not enough
- Having to pay medical bills or legal fees should someone get hurt at your Toronto business.
- Paying the cost of repairs out of pocket if your property is vandalized or damaged by a fire.
- Paying the costs on your own should someone’s property get damaged at your Toronto business.
- Being refused a bank loan because banks can require businesses to have some type of insurance coverage if they’re taking out a loan.
What are solutions to Underinsurance?
Hub International’s North American report also found that 63% of respondents say their property insurance is a “traditional model,” where they obtain coverage through a single carrier. With companies experiencing increased pressure on insurance costs, thanks to economic insecurity and inflationary effects, many might find their situations ripe for alternative risk transfer solutions. Hub’s Outlook Report 2025 also signals the need for companies to develop strategies to better use data and analytics. The report found 96% of companies don’t have formal processes for identifying and obtaining their annually reported property values and exposures. To better respond to their risks, business leaders should massively accelerate “the use of data and analytics to manage insurance costs, enhance employee benefits and [make business predictions],” the report says.
How to determine if you’re properly insured
- Review your building insurance, contents insurance and other policies. Make sure you have an up-to-date valuation of your business assets and potential risks.
- Conduct a risk assessment to identify potential risks and liabilities specific to your industry and business operations. This will help you determine if your current coverage is adequate.
A full rebuild cost assessment is a great way to highlight the underinsurance gap with properties in particular.
- Seek professional advice by consulting one of our isure brokers to help you assess your insurance needs accurately. They can provide valuable insights into industry-specific risks and ensure you have the right coverage in place.
- Conduct a thorough inventory of your business assets, including equipment, stock, and other valuable items. This will help you determine how much cover you need. You should provide this to your insurer at the inception or renewal of the policy, or whenever there is a change that will impact the coverage of your policy.
In conclusion, sufficient business insurance coverage is of the utmost importance when protecting your business is the goal. Being underinsured can have a devastating effect on your company’s survival. Let us do the guesswork for you! If you’re unsure that your current business insurance coverage is sufficient or you simply want to explore your options, contact us or request a quote today!
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