Having a policy and having enough coverage aren't the same thing, and most small business owners don't realize the difference until it's too late.
July 21, 2026
The U.S. is currently experiencing a small business boom. From local boutique bakeries to independent consulting firms, entrepreneurship is thriving. In fact, small businesses account for nearly half of all private-sector employment.
What's more, their bottom lines have been looking up. Small business revenue growth has accelerated significantly, with 62% of owners reporting revenue increases today, up from 47% two years ago.
But beneath the surface lies a fragile and alarming reality. While small business owners excel at serving their customers and growing their top-line earnings, their insurance coverage is failing to keep pace.
According to the 2025 Hiscox Global Protection Gap Report, which surveyed 6,250 small business owners globally, an astounding 77% of U.S. small businesses are underinsured, a figure that has crept up from 75% in 2023.
This massive protection gap opens up a critical conversation about what being "underinsured" actually looks like in practice, the costly misunderstandings of standard policy terms, and the jaw-dropping price tag of a single uncovered claim.
To many business owners, having insurance is a binary concept: either you have a policy, or you don't. Because business owners have a general liability policy or a business owner's policy (BOP), they assume they're fully protected against any disaster.
However, underinsurance rarely means operating with zero coverage. Instead, it manifests in two distinct, equally dangerous ways:
Crucial Policy Gaps: Skipping entire lines of essential coverage. While 65% of small businesses carry general liability insurance, only 49% have property insurance, and a mere 42% hold professional liability coverage.
Outdated Limits: Carrying policies with coverage limits that haven't been adjusted to match the business's growth. A policy structured for a startup with $50,000 in revenue will quickly fall short when that same business begins bringing in $500,000 and hiring subcontractors.
By taking a "set-it-and-forget-it" approach to commercial insurance, small business owners create a false sense of security. They assume that because they pay a monthly premium, the insurance company will write a check for any bad day.
In my experience, underinsurance rarely looks like 'no insurance,' it looks like insurance frozen in time. The most common version I see is a business that bought a $400,000 policy at $1.5 million in revenue and never told anyone, so the coverage limits are no longer sufficient. The second most common is a policy that exists, but excludes the actual risk, a restaurant with real bar revenue and no liquor liability insurance, or a business classified wrong at inception so the coverage arguably doesn't match the operation.
Why is the underinsurance gap widening even as revenues rise? The Hiscox report points directly to a major knowledge deficit across the small business community.
Business owners are experts in their specific crafts, whether that's dentistry, graphic design, or engineering, but commercial insurance terminology is notoriously complex. Insurance jargon can be hard to understand, and it has created deep-seated misconceptions about what standard policies actually cover.
General liability insurance is the bedrock of business insurance, designed to protect against third-party bodily injury and property damage claims, such as a customer slipping on a wet floor.
Yet, 74% of small business owners fail to describe general liability coverage correctly. Many mistakenly believe it will cover their own business equipment if it gets stolen, or pay to rebuild their office after a fire, but those scenarios actually require commercial property insurance.
Even worse, some believe general liability insurance will protect them if a client sues over bad professional advice.
Professional Liability, also known as Errors and Omissions (E&O) insurance, is critical for any business providing a professional service, advice, or specialized design. It protects against claims of negligence, mistakes, or missed deadlines.
Shockingly, 83% of business owners can't correctly describe what professional liability covers. Many assume that if they have general liability insurance, they don't need professional liability, completely ignoring the fact that general liability explicitly excludes professional mistakes.
Almost every business handles online transactions, stores client data, or manages a website. Yet, cyber insurance remains one of the most commonly skipped coverages.
Among the 75% of small businesses with clear cyber exposures, 39% forgo cyber coverage because they believe their current IT systems are secure enough, and 30% dismiss the risk entirely, believing they're "too small" to be targeted by hackers.
In reality, cybercriminals actively target small businesses because their defenses are easier to breach.
The danger of underinsurance comes down to simple math. If a business doesn't have enough insurance to cover its losses, that money has to come out-of-pocket.
To see how serious this can get, look at the gap between what a small business actually has in the bank and what a typical claim costs:
The Average Cash Buffer: Recent survey data suggests many small businesses still operate with thin buffers: Bluevine found that 39% of U.S. SMBs had less than one month of operating expenses on hand.
The Average Liability Claim: According to USA Business Insurance's 2025 National Small Business Risk Index, the average small business liability claim now costs $97,200, up 18% since 2022.
The Average Cyber Claim: If a hacker locks your systems with ransomware or breaches your customer database, the five-year average incident cost for SME cyber claims is $264,000, according to the 2025 NetDiligence Cyber Claims Study.
When a business with $12,100 in the bank gets hit with a $97,200 lawsuit or a $264,000 data breach, that's not a manageable expense, it's the kind of hit that can force a business to close for good. Without insurance to absorb some of that cost, most businesses in this position won't survive it.
If a small business is sued and their insurance doesn't cover the claim, the insurer either defends under a 'reservation of rights' while it disputes coverage, or denies the claim outright. At that point, the business is funding its own defense, which routinely runs tens of thousands of dollars before any verdict. Defense costs and settlement pressure force businesses to settle claims they might have won. The coverage dispute itself can become a second lawsuit.
Many entrepreneurs view business insurance as a luxury for established, highly profitable corporations. The Hiscox report revealed that nearly 45% of business owners believe they should purchase insurance much later in their business lifecycle than they actually should:
Wait for full-time status: 24% wait until they're working full-time on their venture.
Wait for profitability or revenue: 21% delay getting covered until they reach profitability or cross $100,000 in annual revenue.
This wait-and-see strategy is a dangerous gamble. A lawsuit, property theft, or professional mistake doesn't care if your business is still in its "side hustle" or startup phase. In fact, a $10,000 legal dispute that a mature business can absorb could easily crush a pre-revenue startup in its infancy.
"Insurance never covers past claims. The incident that happens the month before you bind is uninsurable forever, and for claims-made lines like professional liability, your coverage only reaches back to your retroactive date. You could also lose deals for being uninsured. Landlords, lenders, and larger clients often ask for a certificate of insurance before they'll sign a lease or work agreement. Then, there's the statutory exposure, operating without required workers' compensation insurance or commercial auto insurance brings fines and, in some states, personal liability for injuries," says Hsyeh.
The good news is that bridging the underinsurance gap doesn't require a massive financial sacrifice. In fact, standard general liability coverage can often be secured for a relatively low rate.
To protect your business, consider taking the following proactive steps:
Ditch the "Set-and-Forget" Approach: Don't let your policies auto-renew without looking at them. Set a calendar reminder to review your coverage limits annually, or immediately if your revenue, payroll, or operating expenses change by 20% or more in either direction.
Match Your Insurance to Your Contracts: If you sign contracts with clients, vendors, or landlords, review their insurance requirements carefully. Ensure you aren't promising "additional insured" statuses or liability limits that your current policy doesn't actually back up.
Address the Big Three Gaps: Speak to an experienced commercial broker about three of the most commonly skipped but highly critical policies: professional liability insurance (E&O), cyber insurance, and business interruption insurance, which replaces lost income if a fire or other disaster forces you to temporarily shut down.
Be Transparent with Your Broker: Ensure your insurance broker has an accurate, up-to-date description of your day-to-day operations. If your business model shifts, for example, if you're a consultant who starts building custom software, your risk profile changes. Failing to report these changes can result in denied claims.
Business insurance should never be viewed as a tedious regulatory hurdle or a compliance box to be checked. When structured correctly, it's a vital financial asset. It's the only financial instrument capable of turning a catastrophic, business-ending lawsuit into a predictable, manageable monthly line item.
As you work to grow your revenue and expand your reach, take a moment to look at the foundation you're building on. A quick 20-minute policy review today could be the single most important investment you make in your business's future.
Elizabeth Rivelli is a business finance and insurance expert at BestMoney.com with over five years of experience covering car, home, life, and health insurance. She has contributed to major outlets such as Investopedia, Forbes, CNN Underscored, U.S. News & World Report, and Bankrate. Elizabeth also partners with insurance companies to provide readers with practical insights into industry trends.
