Central Insurance Blog

Whether you’re a busy business owner of a clothing boutique, truck repair shop, restaurant, or one of the other 34.8 million small businesses in the U.S., you are always looking for ways to save money. Insurance premiums often feel like an easy target for cost-cutting—but reducing coverage limits or skipping critical protections can backfire. In fact, underinsurance can expose your business to detrimental financial losses, while overinsurance—though potentially more costly up front—typically carries far less long-term risk.

“Insurance does cost money, and it comes out of a business’s bottom line, but there’s something to be said about being covered appropriately,” says Eddie Dreyer, commercial lines staff underwriter at Central Insurance.

In the article below, Dreyer outlines possible ramifications to consider before reducing your insurance coverage, and explores how a top carrier like Central can help you balance the coverage you need at a price you can afford.

What is Underinsurance?

Underinsurance occurs when the coverage you carry is less than the true value of what you’re protecting. In practice, if your $1 million building is only insured for $600,000, you’d pay the difference out of pocket after a total loss. This gap often happens when policy limits don’t keep pace with inflation or rising replacement costs, leaving businesses with a false sense of security. In short, underinsurance means you technically have coverage, but not enough to fully recover when you need it most.

What Underinsurance Looks Like In Businesses

Commercial property insurance is often where underinsurance becomes most evident for small and mid-sized businesses. Owners may assume that because they lease space, they don’t need robust coverage or underestimate how much it would cost to rebuild their facility.

“When talking about underinsurance, my mind immediately goes to property,” Dreyer shares. “Do you have enough building coverage? Do you have appropriate limits? Are you insured to value enough that if your building, your office, your manufacturing, your warehouse—whatever you do business out of—if something were to happen, could you rebuild that with that amount?”

Too often, owners look only at market value rather than replacement cost,  forgetting that reconstruction requires new materials and labor, which may cost significantly more. Even partial losses can exceed expectations if coverage isn’t properly aligned.

Digging Deeper: An alternative insurance coverage option for budget-conscious companies is a Business Owner’s Policy (BOP). This bundled policy combines business personal property and liability coverage into one convenient package. Tailored for small to mid-sized businesses, it delivers broad protection at an affordable price. Your local independent Central agent can help determine if it’s the right fit.

Why Underinsurance Costs More in the End

When budgets are tight, it’s tempting to reduce coverage limits to save a few dollars. But this can be a dangerous gamble.

“Insurance costs money. There could be business owners, especially in the small and mid-size space, who might be tempted to save money by reducing their coverage,” Dreyer notes. “But it’s crucial that business owners think long-term.” 

“Business owners should take the time to understand what they have on their policy, and really consider the potential pitfalls before pursuing a reduction in the limits of their building.” – Eddie Dreyer, Commercial Lines Staff Underwriter at Central Insurance

Dreyer warns that, in his experience, business owners without enough coverage have had to dip into retirement accounts, take on debt, or even shut down after a major loss. 

As a result, his advice is simple: Saving a few hundred dollars a year in premiums is not worth risking hundreds of thousands—or even millions—in uninsured losses.

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Other Areas of Underinsurance Risk

While commercial property is the most obvious place where underinsurance occurs, Dreyer points out that businesses must also look at other coverages to confirm they’re properly protected. 

“Businesses need to examine whether or not they have the appropriate coverage for their unique needs,” he explains. “If you’re a manufacturer, do you have equipment breakdown coverage? Do you have business income and extra expense? If you lose a building or part of your operation, do you have coverage to rent another facility or to replace that lost income? These are the kinds of questions businesses need to be asking themselves regularly.”

These coverages are often included at minimal cost but can make a huge difference in recovery after a covered loss event. Without them, you may be unable to operate during a rebuild, losing revenue, customers, and contracts.

Replacement Cost vs. Market Value

Another key misunderstanding when it comes to underinsurance is the difference between replacement cost and market value. “When you talk replacement cost, it’s the cost to repair or replace that building with new materials and building practices,” Dreyer explains. “It’s not necessarily the market value, which is what you can sell it for, and takes into account age, upkeep, and condition of the building. Sometimes that number seems high, but you’ve got to think about new building materials, labor costs, and construction delays. That can really affect the value.”

This distinction is critical now, as inflation and labor shortages continue to push up construction expenses. Business owners who insure for market value instead of replacement cost risk being severely underinsured.

Is Overinsurance the Answer?

While underinsurance can devastate a business, overinsurance usually results in higher premiums without the same catastrophic downside.

Overinsurance occurs when the coverage limits you carry exceed the actual Replacement Cost or Actual Cash Value of the property or asset insured. While it doesn’t carry the same financial risk as underinsurance, overinsurance leads to unnecessary expenses and wasted resources. The key is finding the right balance—coverage that accurately reflects the fully covered value of what you’re insuring.

“A policyholder might think they can rebuild a property for a couple hundred thousand dollars, but it’s insured for a million dollars,” Dreyer comments. “In this case, they’re paying higher premiums for protection they can’t use.  It’s important to understand how big your facility is, the type of construction, and what’s considered building coverage versus business personal property.”

In some cases, overinsurance happens because specialized equipment permanently attached to a building is mistakenly listed as contents rather than part of the building limit. Working closely with an agent and loss control team can help ensure coverage reflects reality.

Dreyer highlights that communication is the key to avoiding underinsurance or overinsurance. Business owners must keep agents informed of changes in operations, new equipment purchases, or facility updates. 

These ongoing conversations eliminate surprises if there is a claim and ensure your business is protected as it evolves.

The Central Perspective on Underinsurance

At Central, we take proactive measures to prevent underinsurance. For example, our commercial property policies include endorsements that eliminate co-insurance penalties and provide inflation guard coverage, so policyholders aren’t punished if inflation or other factors drive values beyond expectations.

In addition, our loss control team can use replacement cost estimators, facility measurements, and detailed data to help agents and businesses set accurate limits. This process helps ensure you don’t fall into the underinsurance trap or waste money on unnecessary overinsurance.

“There’s something to be said for being covered appropriately,” Dreyer mentions. “It allows you to sleep well at night, knowing if something happens, you’ve got the appropriate coverage to get you back to where you were before that loss happened.”

At Central, we believe in delivering more than a policy—we deliver peace of mind. Through clear communication, expert guidance, and tailored coverage, we help businesses balance protection and cost. Because in the long run, being adequately insured always costs less than being underinsured.

Contact a local independent Central agent to learn more about comprehensive insurance coverage for your company.