What is underinsurance?
Your insurance premium is calculated based on your individual circumstances and the amount of cover you choose to take out to protect your business. Underinsurance occurs when you’ve not taken out the right amount of insurance cover for your needs and there will be a variety of factors to take into account when you assess how much insurance you require.
What does it mean if you are underinsured?
Taking out insufficient insurance cover will essentially mean that any claim will be insufficiently covered. Insurers have two routes they may choose to take:
- Charge an additional premium
The premium is recalculated based on the actual amount of stock or turnover and the necessary additional premium is charged. The loss would then be paid in full.
- Apply the ‘Condition of Average’ to the claim settlement
Alternatively, an insurer may reduce the amount of the claim payment in direct proportion to the amount of underinsurance. This is known as applying ‘average’. ‘Average’ is a basic principle of insurance applied to commercial property insurances. It is intended to ensure that the insurer receives a fair premium for one risk and that adequately insured risks are not subsidising those uninsured.
For example, if the cost to rebuild or replace your property or contents is £500k, but you have taken out insurance that will cover you for £250k then you would effectively be underinsured by £250k or 50%. In this example, your insurer would only cover 50% of any claim, no matter the size of that claim. This would leave you needing to pay the remaining costs yourself which could have significant implications for your business.
How do you know if you’re underinsured?
Make sure you let your broker know about any changes to your business.
Remember, that some changes to your business might not just relate to contents or building insurance. If for example, you have bought specialist equipment that takes time to replace, this will impact the amount of time it might take for you to get back on your feet after say, a flood. Therefore, this might impact the amount of business interruption insurance you need.
10 reasons your business might be underinsured
You could be underinsured when:
- You haven’t had your property professionally valued for insurance purposes in the last three years.
- You have altered or extended the property.
- Your insurance cover has been based on the market value of the building when it should be based on what it would cost to rebuild your property.
- You haven’t factored in costs for gates, fences or car parking areas in your calculations.
- Your property is a listed building – the time and cost of repairs/rebuilds are likely to be far greater than for an unlisted building, impacting your business interruption cover.
- You haven’t factored in the costs of professional fees such as an architect or surveyor.
- You haven’t factored in costs such as site clearance or access – particularly where your business might need, for example, a crane or heavy plant to help with remedial work as a result of a claim. This could also add time that needs to be taken into account for your business interruption cover.
- You are carrying more stock now than when you took out your insurance policy.
- You are now VAT registered.
- You have some new plant or equipment that you haven’t told your broker/insurer about. This could impact both the machinery cover you have and the business interruption you need – depending on how long it would take to source a replacement, if necessary.
Finally, for business interruption cover, it is worth spending time to assess the time it would take for your business to fully recover in the event of a significant loss. Businesses frequently underestimate this when selecting their indemnity period. 12 months is often inadequate, and 18 or 24 months might be safer in many cases
It is important to get professional help to make sure you have the right amount of insurance cover for your business. Buildings insurance reinstatement cost valuations should be carried out by qualified building surveyors, whose activities are regulated by the Royal Institution of Chartered Surveyors, following the guidance contained within current Practice Standards issued by RICS.
If you would like to discuss your ‘Property’ and ‘Business Interruption’ insurance, please contact your Darwin Clayton representative.
For other useful information and links please visit our help and advice page.