According to one report, 80% of businesses are underinsured. The question might be, so what? Well, it is important because without the right level of cover you open yourself up to a raft of problems which could seriously damage your business. Put another way, what is the point of buying insurance if it is not fit for purpose in the event of a claim?
June 20, 2016
It is a pretty common problem
One insurer, Aviva, audited claims and found that 77% of properties are underinsured by 45% of the correct value. This equates to underinsurance of, on average, £486,000 per client. Also, The Chartered Institute of Loss Adjusters has found that 40% of businesses lack adequate business interruption cover, which protects against loss of income.
What is underinsurance and why does it matter?
In simple terms it means that you have not got the right level of cover to protect you in the event of a claim. This can have greater implications than you might think. For example:
You have property cover for £5m, but the true valuation should be £10m – protecting your buildings, contents, machinery, plant and stock. A fire causes damage of £1m. All good, as you are way under the £5m limit. Unfortunately not, the claim will be based on the amount of cover you chose. You are underinsured by 50%, so the claim will be paid in proportion to this level, or £500k, leaving you to pay the remaining costs.
Valuation, valuation, valuation
So, you will see from the example above that as the basis of a claim settlement is affected by the calculation of the sum insured, you need to have accurate valuations. Also, these need to be reviewed regularly and updated. We can help you and ensure you know the difference between, indemnity, reinstatement or agreed value, so that you are informed about how any claim will be assessed. Alongside this we can recommend professional valuation experts.
For example the difference between market value and reinstatement or rebuild cost could lead to underinsurance. Other factors may also come into play, such as design, special features or if your building is listed. You also need to take into account the effects of legislation, building regulations and the time any of these factors will add to a claim.
Finally, calculations should include architects and surveyor’s fees, the cost of debris removal, demolition, professional fees, VAT, public authority costs and inflation.
3 Business Interruption pitfalls and how to avoid them
Aside from the physical damage to your business you need to be prepared for the costs that may occur if your ability to trade is affected. This is another area where businesses can be underinsured.
1. Getting your gross profit right
Establishing a sum insured for business interruption can be tricky as the ‘gross profit’ in an insurance policy is different from that recognised by accountants. Gross profit is generally calculated as Sales minus cost of production. However, for insurance purposes this is not the case – which could leave you underinsured if you get it wrong. We can help you with this.
2. Who is on your payroll?
You need to know who is permanently on your wage roll because following a major loss, these wages will still be paid and your business interruption policy will help meet these ongoing costs.
3. Think about longer term cover
Getting the length of the indemnity period right is key, as all claims cover ends at expiration. If you have a claim and the recovery is delayed for any reason – be that planning consent or the need to replace specialist machinery, you could be exposed.
It also is crucial to think ahead and align your policy with your business plan. For example, if you predict growth of say 25% over the next 2 years, then the gross profit sum insured should match your ambition and protect you adequately. Planning for your business includes planning your insurance cover as well.
What should you do next?
Now is the time to quite literally take stock and get a professional valuation of your business. It really is not in your business interests to rely on guess work and out-of-date information. When you invest time and money in buying insurance cover you need to be confident that it is fit for purpose should the worst happen.
Contact us now for a free risk appraisal and advice on how you can get a professional valuation.