Does your insurance have the right SPF?

What do suncream, sunglasses and insurance all have in common? (We’ll give you a clue: it’s not a beach holiday)…

The answer? All three protect you but only if applied properly.

The problem is, underinsurance is only something you become aware of when you make a claim and realise you’re underinsured. By which point it’s too late. It’s a bit like wearing the wrong factor suncream; you feel protected until you realise that you missed a hard-to-reach area and got burnt. Or like driving in winter when the low sun suddenly blinds you and you wish you had something to protect your eyes.

So, what is underinsurance?

Underinsurance simply means inadequate insurance cover. It often relates to an incorrect sum insured or insufficient cover for business interruption. And much like suncream with a low SPF, inadequate insurance means your business and finances stand a higher risk of getting burnt.

Underinsurance is more common that you think

In an attempt to get cheaper insurance premiums, underinsurance is becoming worryingly common. In fact, YouGov research on behalf of Aviva* in September 2022 estimated that 42% of SMEs who insure buildings with Aviva are underinsured. Despite this, 91% were confident they had the right cover in place.  In the same survey, around 10% of SMEs said they wouldn’t survive if they had to pay up to £10k towards a claim that wasn’t covered by insurance.

So we’re on a mission to raise awareness about underinsurance, starting with the 3 most common types of underinsurance we come across.

The 3 common types of underinsurance:

1. Commercial Property

When you buy a commercial property, your mortgage lender will assess your property and assign a reinstatement value. But the assessor is looking to protect the interests of the lender, not you as a business owner. So the rebuild and reinstatement costs may not accurately reflect your business, especially the interior.

“When we review insurance for new clients we find that lots of them have been grossly underinsured, some as much as 50%.” Tony Gibbs, Client Director, Macbeth

Top tip:  Get a bespoke rebuild cost assessment from a chartered surveyor or request a desktop survey from a company like Rebuild Cost Assessments to make sure you have the correct ‘Sums Insured’ limit. If you’re a landlord, you can pass insurance costs onto your tenants.

2. Business interruption

Working out ‘potential’ loss of profits is complicated. If you incur a loss towards the end of your policy and profits have been steadily increasing, you could end up being underinsured.  And depending on the type of business interruption, your profits may be affected for much longer than 12 months.

“If a key piece of kit or machinery is damaged and it takes 6 months to order and install, a 12-month indemnity period would leave you out of pocket. And if a fire meant you couldn’t trade and your customers went to a competitor, you’d need profit protection for long enough to win customers back or attract new ones.” Tony Gibbs, Client Director, Macbeth

Top tip:  Be realistic about how long it would take your business to be rebuilt and fully reinstated with equipment ordered and installed. And ask for a longer indemnity period (we normally recommend 2-3 years) to negate loss of income.

3. Equipment

Contents and equipment are sometimes underinsured because values recorded by an accountant may be based on depreciating costs and may not reflect the ‘reinstatement as new’ value.

“If you buy second-hand equipment, it’s still worth insuring it for the new replacement value rather than the second-hand value – because you might not be able to find it second-hand the second time around.” Tony Gibbs, Client Director, Macbeth

Top tip: Make sure plant machinery and equipment is included in your total ‘Sums Insured’ limit alongside any rebuild costs. Although it’s not nice to think about, it’s worth calculating how much it would cost to completely rebuild and reinstate your business.

How to check if you’re underinsured

There’s no easy way to check if you’re underinsured. But a good broker should ask you lots of questions to get you thinking about every possible scenario so you risk less. In return, we ask for ‘warts and all’ information from you. Like suncream, it’s better to lay it on thick and tell us too much, than not enough.

What you can do to prevent underinsurance:

• When it comes to contents, don’t just select a figure that sounds about right; create an inventory and calculate how much each item or set of items will cost to replace.
• Research the cost of new kit even if you’ve bought it second-hand.
• Assume the worst even if it means paying a higher premium – it’s human nature to underestimate how long things take and how much things cost to repair (much like we might underestimate a renovation project on our own home).
• Consider the impact of reputational damage or customer compensation when calculating profit loss and business interruption.
• Ask yourself if a lower indemnity is really worth saving a few pounds a month.

*Based on a survey of 502 micro, small and medium-sized businesses.