Automated processes, advanced fire protection systems and reliable workflows often give companies a sense of security - especially when combined with what appears to be adequate insurance cover. But this confidence can be misleading. When a loss occurs, it often becomes clear that the agreed insurance amount is insufficient. This is where the issue of underinsurance begins - a frequently overlooked risk that can have serious, even existential, consequences. Why losses are often greater than expected and how smart prevention can help is the focus of this article.
A company is considered underinsured when the insured sum is lower than the actual value of its property - such as buildings, equipment, machinery, inventory, office furnishings or other assets. Business interruption (BI) cover is also affected, including lost profits and ongoing expenses during the agreed indemnity period.
Determining the correct insurance sum is not easy. Many companies know the market value of their assets, but not the full replacement value - which is usually much higher. Leased equipment is another common blind spot, as it is often not recorded in the balance sheet and therefore missing from the insured sum.
Underinsurance is a widespread problem. Studies such as the one conducted by Marshall & Swift/Boeckh indicate that around 75% of US companies are underinsured by more than 40%. The issue is just as common in Europe - often unnoticed until a loss occurs.
Typical causes include outdated insurance values, missing updates after investments or value increases, underestimated restoration costs, overly short BI indemnity periods, or deliberately reduced sums in order to save on premiums.
The consequences can be severe:
A practical example: if a business is insured for €7 million but has an actual value of €10 million, a partial loss of €2 million would only be reimbursed at 7/10 - meaning €1.4 million. The remaining €600,000 must be paid by the company.
Indirect losses often weigh even more heavily than the physical damage. Business interruption can lead to supply failures, loss of customers and declining market share - in the worst case threatening the company's survival. While BI insurance usually covers lost profit and ongoing expenses, high deductibles, short indemnity periods or reputational damage can significantly increase the risk for the business.
Reputational damage is frequently underestimated. If a fire can be traced back to insufficient safety measures, trust among clients, suppliers and employees can erode quickly. Customers may switch to competitors during the downtime, and supply issues during reconstruction further intensify the pressure. Even with insurance, a relevant residual risk remains - highlighting the importance of accurate valuation and a comprehensive fire protection strategy.
The most effective measures include regular reviews and updates of insurance values, independent assessments by external experts and professional analyses by brokers and insurers. Insurance should be understood as part of dynamic risk management and treated accordingly.
Companies should also review supply chains, identify critical dependencies, build redundancy and establish emergency plans to maintain operations even during disruptions.
The best fire damage is the one that never happens. Prevention is always better than repairing damage after the fact. This is exactly where active fire prevention with WAGNER’s OxyReduct® system comes in.
A fire requires three components: oxygen, heat and fuel. If one of these is removed, a fire cannot develop. OxyReduct® generates nitrogen from ambient air and releases it into the protected area. This lowers the oxygen concentration to a level below the ignition threshold of the materials stored there - making fire development physically impossible under defined conditions.
This protects buildings, assets and goods while ensuring operational availability and supply capability. It also reduces risk in a way that insurers increasingly acknowledge. The system is certified and recognised by numerous international insurers.
Conclusion
Two pillars for maximum security
While advanced fire protection cannot replace insurance, it significantly reduces residual risk. Professional risk management requires realistic insurance values, transparency about dependencies, redundancy, emergency planning - and innovative fire protection tailored to the environment.
Insurance cushions the financial impact.
Active fire prevention helps ensure the loss never occurs.
Companies that combine both create a safety net far beyond the standard:
Those who aim not only to insure risks but to actively minimise them should view insurance as a dynamic instrument - and integrate it with modern fire protection solutions. This holistic approach protects not only buildings and assets, but also the long-term viability of the business.
Have you experienced underinsurance, follow-on losses or residual risks after a fire event? I look forward to your insights, questions and discussion.
