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Explain what it means to be 'underinsured' and outline one possible effect of being underinsured on a business. - Leaving Cert Business - Question C - 2014
Question C
Explain what it means to be 'underinsured' and outline one possible effect of being underinsured on a business.
Worked Solution & Example Answer:Explain what it means to be 'underinsured' and outline one possible effect of being underinsured on a business. - Leaving Cert Business - Question C - 2014
Step 1
Explain what it means to be 'underinsured'
Answer
Being 'underinsured' refers to a situation where a business does not have sufficient insurance coverage to fully protect itself against potential losses. In the case of total or partial loss, the insurance policy may not cover the full extent of the damages, leaving the policyholder to bear significant financial responsibility. This scenario arises when a business fails to adequately assess the value of its assets, resulting in inadequate coverage that falls short of the actual risks faced.
Step 2
Outline one possible effect of being underinsured on a business
Answer
One possible effect of being underinsured is a significant financial loss in the event of a disaster. For instance, if a business has an insured building valued at £500,000 but is only insured for £300,000, a total loss due to fire would mean that the business would receive only £300,000 from the insurer. The remaining £200,000 would need to be covered out of pocket, which could severely impact the business's finances, potentially leading to its closure. This could also affect the overall operational viability of the business as it may face difficulties in restoring normal operations.