Why Small Factories Are Underinsured Without Knowing It

Many small factory owners believe their business is properly insured.

The policy is active.
The premium is paid on time.
The insurer sends renewal reminders every year.

Yet, when a major fire or damage occurs, the claim amount received is much lower than expected.

This usually comes as a shock.

In most cases, the problem is not the policy.
The problem is underinsurance.

---

What Business Owners Usually Think

Most small manufacturers assume:

• “My insurer will take care of valuation”
• “The sum insured is close enough”
• “Nothing major has changed since last year”
• “We increased the policy by 10%, that should be fine”

These assumptions are understandable—but often incorrect.

---

What Is Actually Happening

Over the years, several things change quietly:

• Cost of machinery increases
• Replacement cost goes up due to inflation
• Imported machines become more expensive
• Modifications and additions are forgotten
• Old asset values continue in the policy

The insurance policy keeps renewing, but the asset values do not reflect reality.

This gap is underinsurance.

---

Why Underinsurance Is Dangerous

Underinsurance does not mean the claim is rejected.
It means the claim is reduced proportionately.

Example (simplified):

• Actual replacement value of assets: ₹2 crore
• Insurance taken: ₹1.2 crore
• Loss due to fire: ₹50 lakh

The insurer may pay only 60% of the loss, not the full amount.

This surprises many business owners.

---

Why This Is Common in Small Businesses

Small factories usually do not have:

• A dedicated insurance manager
• An asset register
• Periodic valuation reviews

Insurance is handled:

• At renewal time
• Under time pressure
• With minimum discussion

This is not negligence—it is lack of bandwidth.

---

Simple Signs You May Be Underinsured

You should pause and review if:

• Your insurance value has not changed in 3–4 years
• Machinery prices have increased significantly
• You added equipment but never updated insurance
• Your policy value is based on old purchase invoices
• You are unsure how the sum insured was arrived at

If two or more apply, underinsurance is likely.

---

What You Can Do (Without Overcomplicating)

You don’t need to become an expert.

Start with these steps:

• List major machines and buildings
• Ask: “What will it cost to replace this today?”
• Discuss reinstatement value with your insurer
• Review values every 2–3 years
• Take professional valuation only when needed

Small steps can prevent large losses.

---

Final Thought

Insurance is not just a document—it is a financial safety net.

Underinsurance weakens that net silently.

A little awareness today can prevent serious stress tomorrow.

---

This blog is written for small manufacturers and contractors who manage insurance themselves, without dedicated teams.