Inadequate insurance cover when making a claim often results in serious financial problems could cripple a company where the amount claimed is more than the Insurance policy allows for.
Most policyholders are fundamentally uneducated in the consequences of poor sums insured. Underinsurance is a huge problem in the UK in commercial claims, and recently released statistics show a worrying trend.
The Building Cost Information Service has indicated that UK commercial property underinsurance on policies is as high as 80% and on average sums insured often fall short of actual valuations by 20%.
The Chartered Institute of Loss Adjusters (CILA) find most business interruption policies which help a business recover after a major incident are underinsured by an average of 50%.
Property damage and business interruption insurance
The most obvious indicator an insured value is inaccurate is the costing of items such as premises and other installations. This is usually caused by historic, estimated or mis-calculated valuations or by limits in the policy.
A perfect example is:
A commercial property has a rebuild value of £2 million but is insured for only £1million: the underinsurance gap is 50%. Assume the costs for storm or fire damage come to £500,000; the insurer will then likely reduce that claim by a 50% – paying out only £250,000 and leaving a shortfall of £250,000
A small element of underinsurance may mean the instigation of the proportionality remedy under the Insurance Act. This means some insurers will charge additional premium due had the original sum insured been correct. This is few and far between and is only certain insurers – not the whole industry. However with a larger case of underinsurance, an insurer may rely on a failure by the policy holder to make a fair presentation. They will likely refuse to pay the claim in its entirety. It is often the case that cover reviews, sums insured, policy limits and estimates can be left untouched over time, despite major changes like expanded premises, new equipment or a larger workforce. Your best defence is to consult an independent professional such as a Loss assessor or claims management company to audit your assets and advise on replacement costs annually.
The risk of underinsurance is always hidden until you need to make a claim. Identifying and removing it is the responsibility of policyholders who unfortunately don’t have any understanding of the implications should they experience fire damage or flood damage. The overall sum insured needs to be the most you would need to rebuild and replace from absolute scratch. Remember that up to 30% of the sums are usually in the ground!
Checklist To Prevent Underinsurance:
- Are the policy sums insufficient
- Do they actually meet the needs of your business.
- Allow for new-for-old replacement of plant, assets and buildings
- Go for a minimum of 24 months indemnity period for your business interruption insurance. The sum insured should reflect the anticipated business growth – not only historic performance.
- Annually review all policies with your broker
- Update valuations
- Remember elements such as employers’ liability, public liability and professional indemnity.
- Notify Insurers of changes. As your circumstances change, so does your risk.
- Ensure sums insured are index-linked
A pre inception survey is always best when deciding the best cover to meet your needs. Loss Assessors and Claims management companies are usually engaged in this instance. Loss Adjusters from Insurance companies will be completely ruthless towards any business that is underinsured. Insurance Assessors are always recommended to be used in the event of any loss during property insurance claims.