Coverage Gaps: The Silent Business Killer

In 2023, roughly 40% of small businesses that experienced a significant uninsured loss were out of business within two years. Not struggling. Out of business. Employees laid off, doors closed, owner starting over.

I want to be precise about what "uninsured loss" means here. It doesn't mean these businesses had no insurance. They had insurance. They paid premiums. They believed they were protected.

The loss was uninsured because their policy didn't cover it. A gap between what they thought they'd purchased and what the contract actually said.

Anatomy of a Gap

Coverage gaps fall into three categories, each with different origins and different solutions.

The first category is exclusion gaps. Your policy explicitly states it doesn't cover something, and you either missed that exclusion or didn't understand it applied to your situation. Example: Your general liability policy excludes "professional services." You provide consulting as part of your business. A client sues you for bad advice. Denied.

The second category is limit gaps. Your policy covers the type of loss, but your limits are insufficient. Example: Your property policy has a $500,000 limit. A fire causes $800,000 in damage. You're covered for $500,000. The remaining $300,000 is your problem.

The third category is coverage gaps. There's no policy in your portfolio that addresses a particular risk. Example: You have general liability and property coverage. You don't have cyber liability coverage. A ransomware attack costs you $200,000 in recovery and lost business. Neither of your existing policies responds. This is especially critical when managing third-party risk—platforms like TrustLayer can help you verify that your vendors have coverage, but you still need to understand whether that coverage is adequate.

These gaps aren't rare. A study by Insureon found that 75% of small businesses have at least one significant coverage gap. Three out of four.

Why Gaps Persist

If coverage gaps are so common and so dangerous, why do they persist?

The first reason is information asymmetry. Insurance is a knowledge business. Carriers and underwriters understand policy language and risk transfer. Business owners don't. This asymmetry isn't malicious—it's just the nature of specialized expertise. But it systematically benefits the party with more knowledge.

The second reason is incentive misalignment. Brokers earn commissions on policies sold, not on coverage adequacy. They have financial incentive to close sales, not to spend hours explaining exclusions. Again, not malicious—most brokers genuinely want to help their clients. But incentives shape behavior.

The third reason is attention scarcity. Business owners have approximately ten thousand things demanding their attention. Insurance ranks somewhere below immediate fires and above nice-to-have process improvements. It gets attention during renewal season and otherwise sits in a drawer.

The fourth reason is optimism bias. People systematically underestimate their likelihood of experiencing negative events. This is well-documented psychology. It's also why people buy less insurance than they should.

The Most Common Gaps I See

Based on reviewing several hundred commercial policies over my career, here are the coverage gaps I encounter most frequently:

Cyber liability: Approximately 60% of small businesses have no cyber coverage. Of those that do, roughly half have limits that wouldn't cover a significant breach. This is the gap most likely to destroy a modern business.

Employment practices: Most businesses have no EPLI coverage, assuming their general liability handles employment issues. It doesn't. A single wrongful termination lawsuit can cost $200,000 to defend, even if you win.

Professional liability: Businesses that provide any form of advice, consulting, or professional services often lack E&O coverage, assuming their general liability is sufficient. General liability explicitly excludes professional services in most forms.

Business interruption: Many businesses have property coverage but inadequate business interruption coverage. If a covered loss shuts down your operations, property insurance replaces the damaged stuff. Business interruption replaces the income you lose while shut down. These are not the same thing.

How to Find Your Gaps

Gap analysis requires comparing two things: the risks your business actually faces, and the coverage your policies actually provide.

For risks: Make a list of scenarios that could significantly damage your business. Be specific. "Fire at primary location." "Employee sues for discrimination." "Ransomware encrypts customer data." "Key supplier fails to deliver." "Product injures a customer." Not every risk is insurable, but you need to know what you're facing.

For coverage: Either read your policies completely or have someone do it for you. Extract a list of what's covered, what's excluded, and what the limits are. Be specific about sublimits—the headline limit often doesn't apply to specific loss types.

Then compare the lists. For each risk you've identified, can you trace a path through your coverage that would respond? If not, you've found a gap.

This process sounds tedious because it is. It's also the only way to know whether your insurance will work when you need it.

The Cost of Closing Gaps

Addressing coverage gaps costs money. There's no way around that.

Cyber liability for a small business typically costs $1,000-3,000 annually. EPLI coverage runs $1,500-5,000 depending on employee count. Professional liability varies dramatically by profession but often falls in the $1,000-5,000 range.

These are not small numbers for a business operating on thin margins. But they're very small numbers compared to an uncovered loss.

The average cyber incident costs a small business $200,000. The average employment claim costs $125,000 to defend. The average professional liability claim costs $150,000.

Insurance is a bet. You're betting that you'll never need the coverage, and you're buying the peace of mind that comes from being protected if you're wrong. Gaps in coverage mean you're taking that risk with no protection—betting the business that nothing bad will happen.

Some businesses make that bet consciously, understanding the risks and deciding they'd rather invest the premium dollars elsewhere. That's a legitimate choice.

Most businesses make that bet unconsciously, never realizing they had gaps until it was too late. That's not a choice. That's a failure of information.