As a small or medium-sized enterprise (SME) owner, you may already have business insurance in place and assume you are fully protected. In my work as a risk specialist, this is one of the most common assumptions I encounter — and often the most dangerous one.
Many SME owners only discover the weaknesses in their insurance coverage when a claim arises. By then, it is usually too late to fix the gaps. Insurance policies are complex by design, and coverage gaps are more common than most business owners realise. These gaps are not just hidden in the fine print; they can translate into significant financial and legal exposure if left unchecked.
In this article, I will walk through seven of the most common insurance gaps I see in SME policies and explain practical steps business owners can take to strengthen their protection before a crisis happens.
.The Problem with “I think I’m covered.”
One of the most common — and costly — misconceptions among SME owners is the belief that once an insurance policy is purchased, the business is “settled.”
From a risk management perspective, insurance should never be static. Businesses evolve, and risks evolve with them. New contracts, new partners, higher revenue, regulatory exposure, and operational complexity all change your risk profile. Yet many insurance policies remain unchanged for years.
I often remind clients that insurance should move at the same pace as their business. If it doesn’t, the policy may give a false sense of security — one that only collapses when a claim is tested.
Gap 1: Director’s Personal Liability Exposure
Many directors assume that operating under an “Sdn Bhd” structure automatically shields their personal assets. In practice, this protection is not absolute.
From a risk standpoint, directors can still be held personally liable for decisions made in their official capacity — including breaches of duty, regulatory investigations, or allegations of mismanagement. I have seen cases where directors were personally named in legal actions, even when the company itself was insured.
Without Directors and Officers (D&O) insurance, personal assets such as savings and property may be exposed. D&O insurance exists precisely to address this gap, covering legal defence costs and potential settlements arising from governance-related claims.
Gap 2: Unfunded Buy-Sell Agreements
Buy-sell agreements are commonly discussed but often poorly implemented. In many SME structures, the agreement exists on paper but lacks proper funding.
When a partner passes away or exits unexpectedly, the remaining shareholders may face an immediate liquidity problem. Without funding — typically through life insurance — the business may be forced to sell assets, take on debt, or accept new shareholders by default.
From a continuity planning perspective, a buy-sell agreement without funding is incomplete. Ensuring it is properly funded helps protect both the business and the families involved.
Gap 3: Outdated Keyman Coverage
Keyman insurance is designed to protect a business when a crucial individual — such as a founder, revenue driver, or technical specialist — is no longer able to contribute due to illness, injury, or death.
In practice, one of the most common issues I see is outdated keyman coverage. Businesses grow, revenues increase, and responsibilities expand — but the keyman’s sum assured often stays the same for years.
From a risk perspective, this creates a mismatch between the actual financial impact of losing a key individual and the compensation available from the policy. When coverage is outdated, the payout may be insufficient to cover lost revenue, recruitment costs, training, or operational disruption.
To maintain adequate protection, keyman coverage should be reviewed periodically and adjusted to reflect the current value and strategic importance of the individuals being insured.
Gap 4: Business Interruption Exclusions
Many SME owners are surprised to learn that standard business interruption policies are often limited to physical damage events, such as fire or flood.
In today’s operating environment, disruptions increasingly come from non-physical events — cyber incidents, supply chain breakdowns, or regulatory shutdowns. These exposures may sit entirely outside traditional BI coverage.
From a risk management standpoint, this is one of the most critical gaps to review, especially for businesses reliant on digital systems or key suppliers.
Gap 5: Conflicting Beneficiaries
Conflicting beneficiary designations are an often-overlooked risk, especially in businesses with multiple shareholders or family involvement.
This gap typically arises when the beneficiary named in an insurance policy does not align with the shareholder agreement or business succession plan. For example, a policy may name a spouse as beneficiary, while the legal agreement requires the shares to be transferred to a surviving business partner.
From a risk management standpoint, this misalignment can trigger legal disputes, delayed payouts, and operational uncertainty at the worst possible time. Insurance proceeds may be frozen while disputes are resolved, undermining the very purpose of the coverage.
To reduce this risk, insurance policies, shareholder agreements, and succession documents should be reviewed together. Ensuring that beneficiary designations are consistent across all documents helps prevent conflicts and ensures that claims proceed as intended.
Gap 6: Coverage Mismatch Due to Business Growth
As businesses grow, their risk profile changes — often faster than their insurance coverage.
Many SME policies are set up during the early stages of a business and are never adjusted to reflect increased asset values, expanded operations, or higher revenue exposure. Over time, this creates a coverage mismatch, leaving the business underinsured.
From a risk specialist’s perspective, underinsurance is one of the most dangerous blind spots. In the event of a loss, claims are often settled based on outdated sums insured, which may not reflect the true replacement or recovery cost.
Regularly reassessing asset values, inventory levels, and operational exposure helps ensure that insurance coverage keeps pace with business growth and reduces the risk of unexpected out-of-pocket losses.
Gap 7: Claims Process Blind Spots
Even when coverage exists, claims frequently fail due to process issues rather than policy exclusions.
In practice, missed reporting timelines, incomplete documentation, or misunderstanding policy conditions can derail an otherwise valid claim. This is why I encourage business owners to treat the claims process as part of their risk planning — not something to figure out during a crisis.
A simple claims checklist, prepared in advance with your advisor, can make a significant difference when time and clarity matter most.
Addressing Common SME Insurance Questions
Does business insurance cover scams or fraud?
In most cases, standard business insurance does not cover losses from scams or fraud. Risks such as cybercrime, payment fraud, and social engineering usually require specific coverage, such as crime, fidelity, or cyber insurance. From a risk perspective, businesses handling online transactions or sensitive data should review this exposure carefully.
What does business insurance typically cover?
Standard SME insurance generally covers:
- Property damage
- Third-party liability
- Business interruption due to insured events
However, exclusions are common. Risks such as cyber-attacks, supplier disruption, regulatory action, or key personnel loss may not be included unless specifically added.
Do SMEs really need business insurance?
Yes. Business insurance acts as a financial buffer against lawsuits, accidents, and unexpected disruptions. Without adequate coverage, even a single major incident can significantly impact cash flow or threaten business continuity.
Is standard business insurance enough?
For many SMEs, standard coverage is only a starting point. As businesses grow or become more complex, additional protection — such as cyber insurance, keyman coverage, or directors’ liability — may be necessary to address evolving risks.
How to Ensure Adequate Coverage
From a risk management standpoint, insurance should be reviewed at least once a year or whenever there are major business changes. This includes expansion, new partners, higher revenue, or new contracts. Policies should also align with legal and financial documents such as shareholder agreements and business contracts to avoid gaps during claims.
How to Ensure Adequate Coverage
Review your insurance policy at least once a year to ensure it reflects your current business risks. This review should be part of your annual business strategy, especially when you experience significant changes, such as expanding your operations or adding new products. It’s crucial to understand what your policy covers and what it excludes. If necessary, work with an experienced insurance advisor to tailor your coverage to your business’s specific needs. Make sure your policy aligns with your legal and financial documents, including shareholder agreements and business contracts.
Conclusion: Don’t Wait for a Crisis
Insurance works best when it is tested in theory, not in crisis.
Regular reviews, informed adjustments, and alignment with your business structure can significantly reduce unpleasant surprises when claims arise. From a risk perspective, the cost of updating coverage is usually far lower than the cost of discovering a gap too late.
As businesses grow and evolve, insurance should do the same. Treat it as a living part of your risk strategy — not a one-time transaction.
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