Taking out insufficient insurance cover will essentially mean any claim will be insufficiently covered.For example, if the cost to rebuild or replace your property or contents is £100k but you have taken out insurance that will cover you for £50k, then you would effectively be underinsured by £50k or 50%. Any claim you make will only be paid on the basis of the amount of cover you chose, based on what is called the ‘average clause’ – so 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 be anything from hundreds, to thousands, to millions of pounds.How big is the problem?
Looking at a sample of 383 clients where underinsurance was a problem in 2014, Aviva’s survey team referred 206 commercial property clients for a professional valuation. In the remaining 177 cases their own risk management surveyors found that each client was effectively underinsured by on average, by £486,000.
Case study examples:
Underinsurance on stock
“A hairdresser was carrying more stock than they had told their insurer they had. The figure they had provided was used to calculate the insurance cover. So when the business suffered a theft of more than £1,900 worth of stock, the owner found that the claim was covered but was based on an ‘average clause’ – ie. it was paid based on the percentage of cover that was taken out rather than what the cover should have been. This left the owner underinsured by £900 and needing to find that money elsewhere.”
Underinsurance on business interruption
“A manufacturer had a fire at their premises and lost everything. When they took out their insurance they had decided that they could recover from any major event within 12 months and therefore had taken out business interruption insurance to cover them for loss of income for that period.
Unfortunately, although the repairs themselves were covered by property insurance, the extent of the damage and the specialist nature of their business meant that planning permission, repairs, the build time for machinery and time to regain lost custom would take three to four years. This was significantly longer than they thought when they calculated how long they would need business interruption insurance, meaning they were seriously underinsured.
So the company would need to fund the costs related to the loss of income themselves after the insured 12-month period. The estimated amount they were uninsured for was around £7-10 million – costs they could simply not carry themselves. Sadly, the business had to close with a loss of a number of jobs.
How do I know if I’m underinsured?
Make sure you let your broker at Schofield’s know about any changes to your business. Ask them to help you understand how you should assess whether your cover is sufficient for your needs and what professional help may be available.
Remember that some changes to your business might not just relate to contents or building insurance. If you have, for example, bought specialist equipment that takes time to replace, this will impact the amount of time it might take you to get back on your feet after say, a flood. Therefore this might impact the amount of business interruption insurance you need.
To help you understand the sorts of things that might mean your business insurance needs have changed, here is a top 10 list to highlight when you might be underinsured. These points cover the impact on property and/or business interruption insurance.
You could be underinsured when:
1. You haven’t had your property professionally valued for insurance purposes in the last three years.
2. You have altered or extended the property.
3. 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.
4. You haven’t factored in costs for gates, fences or car parking areas in your calculations.
5. 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.
6. You haven’t factored in the costs of your professional fees such as an architect or surveyor.
7. 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.
8. You are carrying more stock now than when you took out your insurance policy.
9. You are now VAT registered.
10. 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.
What is business interruption insurance?
Business interruption insurance should be added to the overall business insurance policy, providing cover for loss of income and helping the business get back on its feet financially. Whilst property insurance would look after the resulting damage of, say, a major water leak, the impact of such an event might leave the business unable to complete its schedule of orders. This is where business interruption steps into cover loss in revenue.
Your business interruption insurance is based on an accurate assessment of the amount of time it would take for your business to recover from an event that impacts your normal operations – this is called the indemnity period. Making sure you have calculated this correctly is key to protecting your business income and cash flow until the business is running as it was before any event occurred.
The recovery process often takes longer than you think – even small, straightforward businesses often need longer than 12 months’ protection. For example, planning permission can often take months before any rebuilding works can even start. If you need specialist equipment think about how quickly it can be sourced.
Also, remember that if you haven’t traded for even one year, your customers will have gone elsewhere. So you will need time to rebuild your customer base and for your turnover to return to pre-loss levels. This should be factored in when calculating the length of time you want your business interruption to cover.
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.
For more information please contact Schofield Insurance Brokers on 0113 250 0377
