The Hidden Trap of Underinsurance
While the economy in recent years has experienced a period of high inflation and companies are investing record sums into modernizing their operations, many are unknowingly exposing themselves to a risk that can wipe out years of work in the event of a loss. Underinsurance—a situation where the insured amount is lower than the actual value of the assets—has become one of the most serious risks facing both households and businesses of all sizes.
Over the past three years, the business environment has undergone changes that have dramatically affected asset values. Double-digit inflation, the energy crisis, and the subsequent rise in construction material prices by tens of percent annually have created a situation in which insurance sums agreed as recently as 2020 may now cover only half of the real value of the insured property.
Why the Problem Is More Urgent Than Ever
At the same time, companies are making massive investments in digitalization and automation. Businesses are installing new production lines, robotic systems, modern IT infrastructure, and energy-efficient technologies. Each of these investments increases the value of insurable assets, but if they are not reflected in insurance contracts, they create a dangerous gap between reality and coverage.
Paradoxically, the more a company invests in its development, the greater the risk of underinsurance it may face. A business that modernized its production three years ago with an investment of CZK 50 million and insured the new equipment for that amount may find today that its actual value has risen to CZK 80 million. In the event of a loss and an improperly structured insurance program, the company may face not only property damage but also a dramatic shortage of funds needed for recovery.
When Mathematics Determines a Company’s Survival
Underinsurance operates according to clear rules defined by the Civil Code (Act No. 89/2012 Coll.).
Act No. 89/2012 Coll., Civil Code, § 2854 – Underinsurance
If, at the time of an insured event, the insured amount is lower than the insured value of the property, the insurance payout is determined as the amount corresponding to the damage reduced proportionally to the ratio between the insured amount and the insured value of the property at the time of the event, unless the parties agree otherwise.
Simply put, the insured amount is compared with the actual value of the property. The same ratio is then applied to reduce the insurance payout.
Imagine a family business that built a production hall five years ago for CZK 30 million and insured it for its full value at that time. Today, building the same hall would cost CZK 48 million due to increased material and labor costs. If a fire causes damage of CZK 24 million, the insurer will pay only CZK 15 million—the proportional share corresponding to coverage of 30 out of 48 million. The remaining CZK 9 million must be covered by the company itself, which may mean the end of the business or at least severe financial strain.
The situation becomes even more complex in operations with multiple types of assets. While buildings are becoming more expensive due to higher construction and labor costs, technology often follows a different pricing dynamic. Some machines may be cheaper today thanks to technological progress, while others are significantly more expensive due to shortages of components or specialized materials.
Hidden Impacts on Business Operations
Underinsurance does not create problems only at the moment a loss occurs. Its consequences can reach deep into company processes and long-term strategy. When a company suffers a loss and discovers that the insurance payout will not cover recovery costs, it may have to reconsider its entire future.
First come the immediate financial pressures. The company must quickly find funds to repair or replace damaged assets. This often means exhausting reserves, applying for emergency financing, or postponing planned investments. However, banks tend to be cautious in such situations, and credit conditions often worsen precisely when the company needs financing the most.
An operational crisis may follow. If the company lacks the funds to restore operations quickly, the downtime becomes longer. Customers begin looking for alternative suppliers, employees may leave due to uncertainty, and competitors take advantage of the situation to gain market share. What began as a technical loss can quickly turn into an existential crisis.
Why Underinsurance Happens So Often
One of the main causes of underinsurance is insufficient communication between different parts of a company. Managers responsible for insurance may not be informed about all investments. Conversely, those deciding on new equipment purchases may not realize that these changes need to be immediately reflected in insurance coverage.
Another factor is the attempt to save on insurance premiums. Some business owners deliberately lower insured amounts to reduce annual premiums without fully understanding the risks involved. The difference in premium between adequate and inadequate insurance may amount to only thousands of crowns per year, while the consequences of underinsurance can reach millions.
The complexity of modern business also plays a role. Companies today own dozens of different types of assets—from buildings and specialized machinery to IT systems and inventory. Each type of asset follows a different price dynamic and carries different risks. Maintaining an accurate overview of their current values requires a systematic approach and often external professional support.
Modern Approaches to Preventing Underinsurance
Responsible companies today approach insurance strategically and use modern tools to manage this risk. The foundation is regular updates of insured amounts—ideally at least once a year, and more frequently for rapidly growing businesses. A systematic overview of all company assets is essential.
Insurance brokers play a key role in preventing underinsurance. They possess deep knowledge of the insurance market and the specific needs of different industries. Unlike insurers selling directly, a broker represents the client’s interests and has access to offers from all relevant insurers. This enables them not only to identify risks of undervaluation but also to design the most effective insurance program at an optimal price.
During regular reviews, an experienced broker can detect potential issues before they become apparent in a claim situation. For example, they may identify that a company has invested in new technologies whose value has not been reflected in the insurance policy or highlight changes in replacement costs specific to the industry.
Some insurers now offer automatic indexation of insured amounts based on price developments within a particular sector. Although this approach is not perfect, it significantly reduces the risk of underinsurance and simplifies policy management.
Industry-Specific Challenges
Each industry faces its own underinsurance risks. Manufacturing companies must monitor not only the value of machinery and buildings but also inventory and work-in-progress. In times of raw material shortages, inventory values may increase several times above their purchase price.
Service businesses face rapidly rising costs of IT technologies and specialized equipment. Restaurants and hotels must account for dramatic increases in the cost of kitchen equipment and interior furnishings. Retailers, meanwhile, deal with the constantly changing value of merchandise inventories.
Construction is among the most vulnerable sectors in terms of underinsurance. Prices of construction materials and labor rise unevenly and unpredictably. A company that stocked materials a year ago may find their current market value has doubled.
Practical Steps for Protection
The first step in protecting against underinsurance is assigning responsibility for managing the company’s insurance portfolio to a specific person. This individual should maintain an overview of all assets, monitor market price developments, and maintain regular contact with the insurer or broker.
Most important, however, is cooperation with a high-quality insurance broker specializing in the relevant industry or type of business. During regular reviews, an experienced broker systematically examines all company assets and assesses their current value based on market conditions. They can often identify potential problems before the business owner notices them—for example, recognizing that investments in new technologies have not been reflected in insurance sums, highlighting changes in replacement costs within the sector, or recommending adjustments to coverage as the business evolves.
A broker also assists during claims handling, represents the client’s interests in dealings with the insurer, and works to secure the highest possible insurance payout. When millions are at stake, their expertise can determine whether a company survives.
An Investment in the Future
In an environment of rapid change and growing uncertainty, high-quality insurance protection is becoming a competitive advantage. Companies with well-structured insurance programs are able to overcome crises more quickly, gain better access to financing, and build trust with customers and business partners.