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This isn’t the first and will not be the last time that I write about the danger of underinsurance, but yet another recent survey has revealed that a significant proportion of buildings in the UK are underinsured.
But it is not just buildings, underinsurance is rife in many areas. Machinery and stock are frequently undervalued, a recent industry study for the Chartered Institute of Loss Adjusters found that over 50% of Business Interruption sums insured are too low and with liability insurances, indemnity limits are often not sufficient to cover potential claims for personal injury, damage to property or financial loss.
With liability covers underinsurance is fairly clear cut, if the indemnity limit is insufficient, Insurers pay the limit and leave the rest to you. With most other business policies, the average condition is used to deal with underinsurance and operates as follows;
If a building insured for £300,000 should have been insured for £375,000, the effect of 20% underinsurance on a £250,000 claim will see the insurer paying only £200,000. Many companies may struggle to survive a shortfall of £50,000.
The insurance industry as a whole has not been particularly good at getting this message across, but is always up against apathy when it comes to insurance. All too many feel that having some sort of policy is enough and take the chance that they will get away with it. And the fact is that most do as very few are unfortunate to suffer a serious loss, but if you do underinsurance can be disastrous.
The reasons for underinsure are numerous. Saving money on the premium is the most obvious and even though there is an awareness that it will be a false economy if a claim occurs, the ‘it won’t happen to me syndrome’ often sways the decision.
The cost of replacement is often underestimated, particularly as most buildings and contents are insured on a reinstatement basis (basically new for old) and there is a tendency to consider the second hand value you can find out more.
Many are too busy to properly review their cover with sums insured and estimates left unaltered for years which do not reflect changes to the business. It is like wills, we know we should, but many never quite get around to it.
With buildings it is a common mistake to look at the market value rather than the rebuilding cost or just consider the cost of replacement with modern materials, whereas partial damage to an older building may involve using original materials even if it is not a listed building.
Do not ignore architects and structural engineers’ costs, which can be substantial, as can debris removal and compliance with up to date building regulations and legislation such as the Disability Discrimination Act. Insurers try to help with measures such as index linking, but to get the figure right a professional valuation for insurance purposes is the safest bet.
Similar considerations apply to machinery and underinsurance on stock tends to be because cover is arranged for normal rather than maximum levels. Another frequent mistake is to rely on the landlord’s policy to cover tenants improvements, generally they do not.
With Business Interruption there is much to consider and you are best to seek advice from your broker, but the most common problems are using the accountants (rather than the insurers) definition of Gross Profit, not looking far enough forward so that the sum insured relates to the period that business is interrupted (the indemnity period) and indemnity periods that are too short.
If you are going to insure, you may as well do it right, it may cost a bit more, but much less than the potential cost of being underinsured.
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