The hidden risk: Underinsurance in bed and breakfast businesses

Running a bed and breakfast (B&B) business, you’ll take pride in providing your guests a welcoming and comfortable experience. But while you’re busy making their stay memorable, it’s easy to overlook a major financial risk—underinsurance. 

More than four in 10 commercial properties are underinsured, with the average shortfall being 40%.¹ Too often, B&B owners only realise they’re underinsured when disaster strikes, leaving them with unexpected costs that can jeopardise their business. Being underinsured can turn an already stressful situation into a financial crisis.

Understanding underinsurance

Underinsurance happens when your insurance doesn’t fully cover the actual value of your property, contents, or business operations. If something unexpected happens—like a fire, flood, or theft—you might not get enough from your insurance payout to cover repairs, replace lost items, or recover lost income. The financial gap can be a considerable strain; in some cases, it could even put your business at risk of closing for good.

Risks specific to bed and breakfast

B&Bs face risks that make underinsurance a serious concern. These include:

Property damage—fires, floods, storms, and structural issues can lead to extensive and costly repairs.

Theft and vandalism—unlike private homes, B&Bs have regular guest turnover, increasing the risk of theft and intentional damage.

Guest-related incidents—accidental damage to property, liability claims for guest injuries, and food safety issues can all lead to expensive legal or repair costs.

Failure to update policies - renovations, additional rooms, or increased guest capacity can mean your insurance policy becomes out of date.

Exclusions and limitations - some policies may have exclusions or limitations i.e. a policy may not cover certain types of damage like flooding.

Business interruptions—if a significant event forces temporary closure, lost income can add up quickly, and without adequate insurance, covering ongoing expenses can be a challenge.

The impact of being underinsured

Underinsurance can have severe consequences for B&B owners. Some of the major impacts include:

Higher out-of-pocket costs—if insurance cover falls short, as the owner, you’re responsible for making up the difference, which can be financially devastating.

Longer recovery times—insufficient cover may delay essential repairs, forcing extended closures and leading to a loss of bookings and revenue.

Potential business closure—if your B&B can’t afford to recover from a major incident, it may be forced to shut down permanently.

Legal and compliance risks—inadequate liability coverage could expose you to lawsuits from guests or employees, further increasing financial risk.

Typical example

Consider a scenario where your B&B suffers extensive fire damage. If your policy is outdated and doesn’t account for rising costs, then your property may only be insured for 70% of its rebuild cost. That means that you will be left to cover the remaining 30%. This situation can be devastating, especially for small business owners who may not have the financial reserves to absorb the cost.

Checklist to avoid underinsurance

To ensure your B&B is adequately covered, take proactive steps, such as:

1. Review your current policy:
   • Examine your existing insurance policy to understand coverage limits and exclusions.
   • Identify any gaps in coverage that may exist.
2. Conduct a rebuild cost assessment:
   • Engage a professional to evaluate the true rebuild cost of your property, including materials and labour. Marsh Commercial can arrange one for you, you can enquire here.
   • Ensure that your policy reflects this assessment to avoid being underinsured.
3. Evaluate business interruption coverage:
   • Assess whether your current policy includes adequate business interruption coverage to cover lost income during repairs.
   • Consider the duration of potential disruptions and ensure coverage aligns with your needs.
4. Understand liability coverage:
   • Review your liability coverage to ensure it adequately protects against potential claims from guests.
   • Consider additional liability options, such as product liability if you serve food.
5. Stay informed about market changes:
   • Keep abreast of local market trends, inflation rates, and changes in construction costs that may affect your rebuild costs.
   • Adjust your insurance policy accordingly to reflect these changes.
6. Consult with an insurance professional:
   • Schedule a meeting with an insurance broker or advisor to discuss your specific needs and concerns.
   • Seek their expertise in identifying appropriate coverage options for your B&B.
7. Review and update regularly:
   • Set a reminder to review your insurance policy at least annually or whenever significant changes occur (e.g., renovations, changes in guest capacity).
   • Make adjustments as necessary to ensure ongoing adequate coverage.

Summary

Underinsurance is a hidden risk that many B&B owners may not recognise until it is too late. By understanding the specific risks associated with your business and taking practical steps to ensure adequate coverage, you can protect your investment.

As the appointed insurance broker for B&B Association members, Marsh Commercial is here to support, advise, and provide comprehensive B&B insurance that you can trust. Contact us to ensure you are fully covered and to inquire about scheduling a rebuild cost assessment. Protect your business and your peace of mind by addressing the risks of underinsurance and safeguard your B&B against the unexpected.

Sources

1. insuranceage.co.uk/insight/7955475/almost-half-of-uk-commercial-properties-underinsured-gallagher