How to identify and correct insurance coverage gaps
Insurance provides critical financial protection to small businesses. However, coverage gaps can jeopardize that protection. Gaps in insurance coverage occur when a company doesn’t have a specific type of protection it needs or when the coverage limit on a particular policy isn’t high enough to address possible claims. In other words, a coverage gap exists when the potential financial impact from events exceeds the protection a company’s business insurance portfolio provides.
Identifying that type of scenario is crucial for business owners. People whose companies have been hurt by gaps in insurance coverage know that it’s painful to be pretty well insured but to miss something that leaves the business with a huge out-of-pocket expense.
This article focuses on the critical topic of insurance gaps, explaining what they are, how to detect them, and how to correct them.
Insurance coverage gaps: often subtle but always significant
It’s a common and understandable misconception that if you have a general liability insurance policy, your small business is well protected from risk. It’s true that carrying general liability coverage is essential for most companies, but having enough coverage and having protection from other risks not addressed by this policy is also critical. That’s why understanding your company’s exposures and the corresponding policies that respond to those types of claims is so important.
Coverage gaps from insufficient policy limits
Coverage limits are the maximum amount an insurance policy will pay for a covered loss or claim. Every policy has a limit. For example, a general liability policy might have a $1,000,000 limit. In that case, the policy will pay an approved claim of $850,000. However, if the amount of a claim is $1,250,000, the policy will only cover $1,000,000. That leaves a coverage gap of $250,000 that the business has to find a way to pay.
Some coverage gaps caused by insufficient limits are easy to identify. If you have an asset that costs $750,000 but the property policy covering it has a $500,000 limit, the disparity is clear. Other potential gaps are more nuanced.
For instance, it’s impossible to know how much a person will ask for in a lawsuit when they get hurt on your property. Consequently, you can’t be sure your general liability limit will be high enough to cover every potential claim. In that case, doing some research about claims against companies like yours, talking with owners of similar businesses, and discussing your coverage with your insurer or a licensed insurance professional can help you get a feel for policy limits that are high enough to address the types of claims you’re likely to face.
Coverage gaps from missing policies or endorsements
Another source of gaps in insurance coverage is not having a particular type of coverage that you should carry. For instance, you might have general liability insurance and assume it covers your business property when, in fact, that’s not something addressed by this type of policy. You may also have a gap if you hire your first employee but don’t buy a workers’ compensation policy, or you purchase tools and equipment for your business and don’t secure a policy endorsement to cover them .
Or here’s another example. Let’s say your business has historically focused exclusively on walk-in traffic. Then, you decide to purchase a van and start offering delivery service.
At that point, you need to purchase a commercial auto policy to cover liability arising from the use of the vehicle (like being at fault in an accident) and damage to the van. If you don’t realize you need that policy and therefore fail to purchase it, you now have a coverage gap. That breach in your financial shield exposes your business to the potentially devastating cost of a lawsuit or damage to your vehicle.
Of course, that example is pretty straightforward. Most people who buy a vehicle for their business will think, “We need to get that asset insured!” However, there are several types of policies or policy endorsements (meaning add-ons that enhance a policy’s coverage) that might not be so obvious. For instance, do you need a professional liability policy (you do if your business offers professional advice or services) or an employee benefits liability endorsement for your general liability policy (probably if you have an employee benefits program)?
Consequently, it’s crucial to look for and address coverage gaps, as we describe below.
Take these steps to prevent business insurance gaps.
You can greatly reduce your company’s risk of being adversely affected by an insurance coverage gap by following these steps:
- Conduct a comprehensive risk assessment. Spend some time analyzing and documenting your company’s assets, operations, and potential liabilities. How could weather events, employee and customer injuries, product liability, cyberattacks, and other events impact your business? The longer your list of risks is, the better. Some entries might be outside the realm of possibility, but you want to cast a wide net and then reel it in as appropriate.
- Research the policies needed to address your risks. The biBerk website has helpful information on every business insurance policy we offer. We also have licensed insurance professionals who are happy to answer your questions. As you do your research, be sure you understand any policy limits or exclusions.
- Purchase the appropriate policies. Obtain the coverage you need to address your risks. That includes the types of insurance and the appropriate insurance limits based on your research and any advice from our insurance experts.
- Review/adjust your coverage regularly. You should set the cadence for your insurance reviews based on how quickly your company is growing or changing. If you’ve been in business for several years, it might make sense to review your policies annually. If you’re a startup that’s continually purchasing new assets, hiring more staff, etc., you might need to compare your coverage to your risks every six months or even more often if appropriate.
Don’t let coverage gaps threaten your business.
Being hit with a lawsuit or property damage not covered by business insurance (or not covered sufficiently) can devastate a small business’s finances. Fortunately, you can be proactive in spotting and addressing coverage gaps so you maintain comprehensive financial protection.
If you have questions about your risks and the corresponding policies, don’t hesitate to contact our insurance experts. They can help you understand your exposures and how to address them effectively.