What is Coverage Adequacy Score?
An insurance cover vs risk benchmark compares your current coverage against actual risk exposure to identify gaps and over-insurance.
The Formula
Adequacy = (Coverage Amount ÷ Risk Exposure) × 100
Worked Example
A small business: $500K property cover (value $550K), $1M liability (exposure $1.5M), $100K contents (value $80K).
- Property: $500K ÷ $550K = 91% (slightly underinsured)
- Liability: $1M ÷ $1.5M = 67% (significantly underinsured)
- Contents: $100K ÷ $80K = 125% (slightly overinsured)
- Average adequacy: 94% but liability gap is dangerous
📌 Overall 94% adequacy hides a critical 33% liability gap. Increase liability cover from $1M to $2M immediately.
Why This Matters
Claims protection
Underinsurance triggers proportional clauses that reduce payouts. 80% cover means only 80% of claims paid.
Legal compliance
Workers' compensation insurance is required in most states. E&O insurance is required in many regulated industries.
Business survival
Uninsured losses bankrupt 40% of small businesses. Adequate coverage is a survival requirement, not an optional expense.
Common Mistakes
❌ Same cover year after year
Asset values, revenue, and risks change annually. Review coverage at each renewal to maintain adequacy.
❌ Minimum liability cover
$1M liability seems high until a serious claim. Professional services should carry $2-5M minimum.
❌ Ignoring business interruption
Property insurance replaces assets but not lost revenue during recovery. BI cover bridges the income gap.
Industry Benchmarks
| Category | Good | Average | Poor |
|---|---|---|---|
| Property Cover | 100%+ of replacement | 80-100% | Below 75% |
| Liability Cover | $2M+ (small business) | $1-2M | Below $1M |
| Business Interruption | 12+ months cover | 6-12 months | No cover |
Source: III Small Business Insurance Guide 2025
Benchmark data sourced from III Small Business Insurance Guide 2025.