How was copper wire invented? Two Scotsmen were fighting over a penny (we can tell that joke because we’re Scottish!).

No-one likes spending more money than necessary, but protecting your business against risk is no joke. There comes a point when the desire to save some cash can have a detrimental effect. Yes, we’re here to tell you that cheap insurance isn’t always the best insurance. In fact, it rarely is.

We’d always argue for striking a balance between cost and cover. We’re certainly not arguing you should seek out the priciest option, since that’s not always a guarantee of quality either. But we are quite convinced by the old adage of “buy cheap, buy twice”.

Like most things in life, there’s an element of getting what you pay for when it comes to protecting your business. A temptingly low price can often mask a number of shortcomings which could cost your business more in the long run. Here are just a few:

Miserly coverage limits

One of the most common issues with cheap insurance policies is insufficient coverage limits. This might be less of an issue for minor claims, but if you end up facing a more significant incident they can very often fall short of what’s needed.

For example, a standard public liability policy might offer £1 million in coverage. While this sounds chunky, you can burn through that quite quickly in the event of a serious accident or lawsuit. Legal fees alone can run into hundreds of thousands of pounds, leaving the business exposed to potentially crippling costs.

And don’t forget average clauses. In a nutshell, if you have a property that’s underinsured, the average clause will proportionately limit other claims on the same policy. So if your warehouse is insured for £500,000, but a total rebuild would cost £1m, the most you’ll get for any claim on that policy would be 50% of what you’re looking for.

Excessive excess

Isaac Newton’s third law of motion (buckle up, we’re getting highbrow) says that for every action there’s an equal and opposite reaction. Whether or not Newton realised this would also apply to insurance is unclear, but one of the trade-offs for a lower-cost policy is usually a high excess; that is, the price you have to pay before your insurance will kick in.

Let’s say you have a property insurance policy with an excess of £10,000. In the event of a £15,000 claim for water damage, say, the business would need to pay £10,000, with the insurer covering only £5,000. If you’re a smaller business, coughing up £10k could be a fairly tough ask. Paying a little more on your premium would be likely to bring down that excess, and therefore reduce the strain on your cash reserves if things do go pear-shaped.

Unexpected exclusions

One of the most common frustrations we hear from clients (and, quite honestly, from anyone who discovers we work in insurance) is that their policy doesn’t cover something they expected it to cover. It’s sort of like paying for the entry level model of a car only to be surprised to find it doesn’t come with the 21-inch alloys.

Cheaper insurance policies often contain numerous exclusions – specific situations or types of risk that aren’t covered. These exclusions can leave businesses vulnerable to common risks, especially when your broker hasn’t explained what these exclusions might mean in practice.

If you have a cheap cyber insurance policy, for example, it might exclude coverage for phishing attacks. If an employee is tricked into paying a fraudulent invoice, you could find your budget policy won’t cover the loss.

Business interruption let-downs

Business interruption insurance can feel like one of those sensible but probably unnecessary parts of insurance cover. That’s absolutely correct – until it becomes necessary. Take your pick from storm damage, ever-more sophisticated and determined cyber-attacks, accident and injury claims, flooding, fire… any one of these could strike your business without notice. That’s the thing about unexpected events.

If that day ever comes, you’ll be glad you paid a little extra for effective business interruption insurance as part of your disaster recovery plan. It means that your insurer will help to relocate your operations, if necessary; pay for recovery of critical IT systems; cover employee salaries while you get control of your bank accounts from cyber-hackers; and take care of the costs for long enough to allow you to deal with the problem while trying to run your business.

Cheaper polices might give you elements of this cover, but the last thing you need is to feel like you’re getting back on your feet only to have the rug pulled out from under them again.

A poor claims service

The true test of an insurance policy comes when you need to make a claim. Cheaper insurers often cut costs by reducing their claims handling resources, which can lead to delays, disputes, and frustration when the chips are down and you really need the support.

We don’t need to tell you that a delayed or – worse – a denied claim can have serious consequences, potentially forcing your business to take on debt or even cease operations while things are sorted out. And if you’re not trading, the risk to the health of your business only increases.

Working with a helpful, efficient and understanding claims service can mean all the difference between getting up off the canvas and staying down for the count.

As we said at the start of this article, we’re not suggesting that paying top dollar for your insurance policy is the correct way to go – and nor is it a guarantee of the right cover.

But our advice is, has always been and always will be that protecting your business from risk is not an area where you want to cut corners. The first thing to check is that your cover actually gives you the protection you need. This is about making sure you’re able to focus on your business even when something unexpected happens, as it surely will at some point.

Then you can make sure your broker is able to take your requirements to an insurer which can give you the right combination of cover and value. You don’t want to take the additional risk that your policy won’t perform when you really need it.

For more information, or to arrange a complimentary review of your insurance, get in touch by completing our form here.