Underinsurance – A Universal Risk

There’s no doubt about it, underinsurance can affect anyone, anywhere, from all walks of life.

So whether you’re a retail warehouse owner, a hotelier, own a motor showroom or workshop, or a construction company, it’s a risk you need to be thinking about.

We asked our team of experts to comment on the main areas of concern in their areas of expertise when it comes to underinsurance (because let’s face it, we wouldn’t be doing our job as professional advisors if we didn’t).

1. Motor Trade

• Cost of Replacing Your Stock, Workshop Equipment and Other Contents – ensure you have an accurate idea of the current
  replacement cost of your assets and undertake a regular review of customers vehicles in your possession. It’s really important this
  reflects the true maximum value of all vehicles in your possession at
  any one time.
• Buildings Reinstatement Cost Assessment – We recommend that a professional assessment is carried out periodically to ensure
  that your Buildings Sum Insured (for a showroom or workshop for example) are adequate in the event of a claim. We can assist you in
  organising this and once completed, we will work with you to review your buildings insurance policies to make sure that you have the right level of protection in place.
• Business Interruption – Be realistic about how long it could take your business to recover following a major claim. You’ll need to
  consider factors such as rebuilding, site clearance, planning delays, long lead times on specialist equipment and the time needed to regain lost customers who may have turned to competitors during this downtime. We’re here to help you assess these risks in detail and determine an appropriate indemnity period.

Top tip: “When arranging insurance we often hear ‘nothing has changed since last year’, but in reality this is rarely the case. With soaring prices, it’s especially important that your sums insured are adequate for replacement at the time of the loss.”

Andy Vickers & Alex Dell, Client Manager – Commercial & Technology

2. Construction

• Contract Works Insurance – ensure your policy meets the required total contract value including Professional Fees. Where the works are subject to a form of contract, such as a JCT, the professional fee uplift will be specified in the contract – typically 15% or 20%. Some insurers wordings will include an automatic professional fees uplift, but make sure you’ve checked your policy wording to ensure the specified amounts are correct throughout the lifetime of the project.
• Contractual requirements – take care in checking that your insurance is arranged appropriately to meet any contractual requirements (such as joint names, if required) and that variations to the contract and/or increases in the contract sum are reflected throughout the contract period.
• Own Plant – the sum insured (including a single article limit if applicable) should represent the basis on which the insurance is
  arranged i.e. reinstatement as new or indemnity. Any lenders’ interest should be correctly noted and their requirements are met by the
  policy.
• Hired in Plant – ensure the maximum limit for any one item of plant is adequate and also that your policy includes cover for “continuing hire charges” i.e. to reimburse the hiring company for the period that they are unable to hire out the plant following a claim (subject to the hiring agreement).
• Liability – ensure that the limits of indemnity selected represent the exposure in terms of employees and persons on site. Also check if there is a contractual requirement for any specific works where a higher limit is required by local authorities for things like working on or near Highways.

Top Tip: “When entering into formal contracts it’s advisable to have a professional insurance broker check that the insurance requirements are fully met by the policies in place. This will help you order avoid potential underinsurance, and the danger of not complying with important contractual conditions.”

Barry Davies, Client Director – Commercial & Technology

3. Hoteliers

• Building rebuild cost – especially if the property is listed. We recommend you always get a professional independent valuation
  every couple of years. This is particularly relevant when you consider the increase in construction costs, labour and materials over the past few years.
• General contents of the property – which is based on a replacement new for old basis. Unless you actually work out the replacement cost of all furnishings and accessories, you never realise how much it would actually cost to replace (or repair) what you currently have.
• Business interruption – the loss of income or gross profit following an insurance claim. The correct period of indemnity needs to be selected. For hoteliers we normally recommend considering 24 or 36 months instead of the basic 12 months that’s normally offered. In the event of a major claim, debris removal, planning permission (if needed) and getting builders to quote, start and complete the work so you can trade again, would more often than not far exceed 12 months. Repairs always take longer than people hope.

Top Tip: “The insurance definition of ‘loss of gross profit’ differs from an Accountants definition, as the insurance figure should be adequate to cover all fixed costs, such as wages, during the period of not being able to trade.”

Catherine Smith, Client Manager – Commercial & Technology

4. Retail Warehouses

• Check your policy limit – The limit needs to represent the maximum value held at any one time, insurers will factor in an average exposure when calculating your insurance premium. This means should you need to make a claim, the insurer will likely pay the average amount rather than the maximum.
• Be aware of stock levels – Take into account maximum stock holding during busy periods and when these periods are. You should
  also assess what the average value of stock held is outside of busy periods. Whilst your limit should cover the maximum value of goods
  at any one time, underwriters will consider lower rates should the stock holding be lesser during less busy months.
• Third parties – If you’re using a third party to store your goods, check if they are actually insuring your goods or insuring their ‘liability’ for your goods. Third party warehousekeepers/fulfilment companies have terms and conditions which limit their liability for your goods (UKWA, BIFA, RHA Storage) so don’t assume the goods are insured, and if they are, check what they’re insured for.

Top tip: “Inflation has caused a surge in the price of goods, increasing cargo owners stock holding to rates rarely seen before. Stay in touch with your broker, check your limits and know the ramifications of underinsurance.”

Danial Wright, Client Director – Freight and Marine

Worried about being underinsured?

Talk to Barry, Catherine, Andy, Alex, or Danial today and risk less.