“Don’t worry. My brother-in-law handles the insurance. We’re covered.” I heard those words a few months back while working with a medical practice. The managing partner also owned two 15-story buildings, and as part of my due diligence, I requested the binded policy to review the details and check for insurance coverage gaps.
He saw no reason for concern. Someone he knew and trusted was handling the coverage, the premiums were being paid, and there had never been an obvious problem. After a friendly discussion, he agreed to humor me.
What I found should concern every business owner. There was no business interruption coverage, and only one of the two buildings was insured. In both instances, the exposure runs an easy high six or seven figures in the event of a loss. This was not a minor administrative error. It was one of the more serious insurance coverage gaps I have seen, hiding in plain sight. The policies existed. The premiums were being paid. Everyone believed the organization was protected. It was not.
Trust Is Not Financial Control
Many insurance relationships are built on trust, and there is nothing inherently wrong with that. The problem begins when trust replaces verification, since that is exactly the condition under which insurance coverage gaps go unnoticed for years.
In my work as a CFO, part of due diligence involves identifying the gaps between what management believes and what the records actually show. Insurance coverage gaps consistently come up short in this process. The CFO should not replace the insurance broker, but brings a different perspective by connecting the policies to the company’s assets, cash flow, contractual obligations, and ability to survive a serious disruption.
The first question is not, do we have insurance. Most businesses do. The better question is, does the insurance we have cover the business we are operating today.
Businesses Change Faster Than Their Policies
A business rarely stays static between insurance renewals. It adds equipment, employees, locations, services, technology, debt, and contractual obligations. Ownership structures may also change as entities are created or assets are moved, and each of these changes is a potential source of new insurance coverage gaps.
The renewal process can create a false sense of security. Management pays the invoice and assumes everything has rolled forward appropriately, but renewing last year’s policy does not necessarily protect this year’s business. In the two building example, no one had completed the simple but essential reconciliation between the properties that existed and those listed on the policy.
In finance, bank accounts, inventory, receivables, debt, and fixed assets all get reconciled regularly. The same discipline should apply to reconciling the assets and risks of the business against its insurance coverage, since that is precisely where insurance coverage gaps tend to hide.
Property Coverage Does Not Protect Cash Flow
The absence of business interruption coverage in this case was just as concerning as the missing building. Property insurance may provide funds to repair or replace a damaged asset, but a repaired building does not solve the immediate cash flow problem created when the business cannot operate.
Payroll, debt payments, rent, and other fixed costs do not automatically stop. Customers may find alternative providers, and the return to normal operations may take much longer than expected. This is where insurance coverage gaps stop being purely an insurance question and become a question of liquidity and survival.
Insurance Review Should Be an Operating Discipline
Insurance should not be examined only when the renewal notice arrives. The organization should trigger a review whenever the risk profile changes materially, such as buying a location or major equipment, entering a new market, signing a significant contract, taking on debt, acquiring a business, or changing the legal structure. Reviewing at these trigger points is one of the most effective ways to catch insurance coverage gaps before they become claims.
“Someone Handles It” Is Not Enough
The most dangerous insurance coverage gaps may not be buried in the fine print. They may be the gap between what management believes is covered and what the policy actually covers. In the medical practice case, the managing partner believed that two substantial buildings and the income associated with them were protected. A basic due diligence review revealed that one building was not insured and business interruption coverage was missing entirely.
That is why reviewing the actual policies matters, in order to understand the financial consequences of the risks the company is carrying. Insurance coverage gaps can quickly become a cash flow crisis, a covenant problem, an operational shutdown, or a threat to the survival of the business. By the time a claim exposes the problem, it is too late to correct the policy.
“Someone handles it” is not a control. “Show me how we know we are covered” is.
Before your next renewal, compare your current business with what is actually listed in your policies. Do not begin with last year’s coverage. Begin with today’s risks.
Insurance needs vary by organization and policy. This article presents a financial and operational due diligence perspective and is not legal or insurance advice. Coverage questions should be reviewed with qualified insurance and legal professionals.
