Underinsurance is a widespread issue with as many as 80% of UK commercial properties being underinsured and 43% of businesses having inadequate business interruption cover.
Having the correct insurance could be the difference in your business surviving a loss or closing its doors forever.
What is underinsurance?
Underinsurance results when your sums insured are too low to adequately cover your business in the event of a claim.
This can range from a failure to set accurate sums insured for your property, overestimating your business’s resilience to a loss effecting your business interruption cover, not reviewing your liability exposures or simply not having the correct cover in the first place.
What happens if I am underinsured?
In the event of a claim an insurer will only at best pay what you are insured for. This means if you have insured your buildings for £200,000 and there is a loss and the buildings costs £300,000 to rebuild, your insurer will only ever pay £200,000.
However most policies are subject to an Average condition, this means that in the event of a claim insurers would reduce the settlement reflective of the percentage of underinsurance. Simply put if you declare a sums insured 50% less of the true value, your insurer will only pay 50% of the claim. So if you declare your property at £200,000 and it costs £400,000 to rebuild your insurer will only pay £100,000
How to avoid underinsurance
To look at this lets break it down into examples of different policy covers.
To avoid underinsurance of your property whether this is buildings, contents or stock firstly ensure your calculations are based on the correct settlement basis. For example will your policy settle a claim on a reinstatement basis (cost of replacement with a new one) or indemnity (replace at second hand value ie what it is worth)
Ensure regular building valuations are conducted and regular reviews of your contents, its easy to forget the new printer and extra computers you bought so keep your policy updated regularly, don’t wait until renewal.
63% of underinsurance cases of property are said to be as a result of failure to carry out regular valuations and assessments
Underinsurance of business interruption commonly arises from the misunderstanding of traditional gross profit v’s insurers gross profit definition.
Traditional gross profit would ordinarily exclude wage roll and other costs which should be included in the insurer’s definition.
The second and sometimes the most important is the indemnity period and the relaxed or unrealistic ideal of how quickly your business could be back up and running.
Remember your business interruption indemnity period covers you from the point of loss to as long as it takes for you to be trading at the same level as if the loss had never occurred.
Most people underestimate how long it would take to rebuild a building, how long it would take to replace contents and machinery, what happens to your customers in the meantime? Do they start to use other suppliers? If so this could take years to reestablish
To avoid this your business should consider a business continuity plan and speak to your insurance advisor to understand how to accurately calculate your sums insured.
Underinsurance of your liabilities such as Public Liability come as a result of businesses insuring in line with contract requirements or statutory limits.
In an ever increasing liable culture incidences are resulting in more claimants and bigger settlements.
As such it is important to review your own needs and ensure you meet the requirements and exposure of your own company and not just your contractual cover requirements. Consider if your indemnity limits are adequate to cover multiple claimants.
Absence of Cover
Underinsurance could exist in a simple form of not having any cover at all or not having all the covers required to protect you and your business.
How does having a broker help reduce the chance of underinsurance?
Non advised sales and insurances bought online greatly increases the chances of underinsurance, An insurance broker can provide guidance and discuss your requirements to obtain a full understanding of the threats to your business in order to assess all your insurance needs.