How much will getting back to business really cost you?
What is underinsurance?
Underinsurance happens when you don’t have enough insurance cover to meet your needs. If the stated value of your property and assets aren’t correct, or the time it takes to get your business back up and running after an incident are underestimated, you could be underinsured.
Why is underinsurance a problem?
Unfortunately, the unexpected can happen and you may need to make a claim. If you do, the last thing you want to hear is that the level of insurance cover you have won’t cover your costs. But that’s exactly what could happen if you are underinsured.
You’ve probably noticed everyday price rises caused by inflation, but have you stopped to think about how inflation might affect a claim on your insurances?
Inflation, supply chain issues and labour shortages are all affecting the cost and speed of getting businesses back up and running after an incident – with some prices rising faster than others.
Most businesses think they’re prepared for the worst. But, without adequate cover, replacing buildings or stock – or even having to pause operations entirely – could have extremely serious consequences. In fact, 10% of SMEs, that’s more than 500,000 UK businesses, believe they wouldn’t survive if they had to pay just £10,000 towards a claim that wasn’t fully covered by insurance.
Which areas are known to be at risk of underinsurance?
We’re seeing underinsurance becoming a more pressing issue. It can happen across any industry and any type of insurance policy from commercial property insurance right through to personal home insurance.
There are all sorts of factors that could leave you with the wrong level of cover, many of them out of your hands but an up-to-date valuation can help make sure your level of cover reflects the true value of your business or property.
Although any insurance policy can be affected by underinsurance, there are a few areas we see commonly affected:
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.
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.
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.
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
Areas affected by underinsurance
We understand that the topic of underinsurance can seem a little overwhelming so we’ve created a number of resources you can download and read in your own time.
When we review insurance for new clients we find that lots of them have been grossly underinsured, some as much as 50%
What does underinsurance mean?
Underinsurance means inadequate cover to meet your needs. Unfortunately, the unexpected can happen and you may need to make a claim. If you do, the last thing you want to hear is that the level of insurance cover you have won’t cover your costs. But that’s what could happen if you’re underinsured.
How can I calculate underinsurance?
The best way to calculate whether you’re underinsured or not is to get a professional valuation, have regular catch-ups with your broker and make sure that your sums insured and period of indemnity are up-to-date and correct.
How can I avoid underinsurance?
Get a professional valuation to help you get a true idea of the total value of your assets so you can choose an appropriate level of cover.
Also have regular check-ups with your broker. It can be difficult to keep on top of the market conditions that affect your insurance policy. Regular check-ups with your broker can help you understand how much cover you need.
Make sure you tell your broker of any changes you’ve made.
What happens if I'm underinsured?
Being underinsured puts you and your business at risk of having a shortfall to pay should you need to make a claim.
For example, a distribution company has an annual turnover of £1 million with £600,000 gross profit. They took out a business interruption policy, with a sum insured in line with the £600,000 gross profit.
However, as the policy was written on a 24-month indemnity period, this meant the sum insured applied to two years, meaning they were only 50% covered. The company suffered a loss and made a claim for £200,000 to cover the four months it had to cease operating. As the policy had an average clause, the claim was reduced by 50%, and the company only received £100,000.
Why won't an insurer always cover the full loss?
Any claim will only be paid based on the amount of cover chosen. This is called the average clause.
Any claim you need to make – however big or small – will be impacted by the percentage difference between your recommended total sum and the actual sum for which you’re insured.