The swathe of flooding that has swept across so much of the UK in recent weeks is an unwanted reminder of just how important insurance is to our everyday lives. But the commercial and domestic insurance policies that underpin our financial security are only effective if the level of cover in place is accurate. But in the vast majority of cases it isn’t.
Under insurance is a perennial problem in the insurance market and too many firms fall into the trap of thinking that having a policy is enough. They mistakenly believe that in the event of a claim they’ll be able to iron out any issues or inconsistencies.
But in cases of significant under insurance the settlement received following a claim will fall well short of what’s needed. If, for example, your sums insured are only 60% of what they should be, then your insurer can apply that percentage to your claim and only pay out 60% of the total.
This ‘application of average’ could quickly leave you with an unwelcome and potentially crippling bill to pay and so before you renew your business insurance programme this year, there are three areas of potential under insurance I’d urge you to investigate.
The first is the rebuild valuation on your commercial premises and research carried out by the Building Cost Information Service has found that 80% of commercial properties are under insured.
The rebuild cost differs from the market value of your property and depending on the fluctuating cost of materials, such as steel or bricks, it can change dramatically within timeframes.
In the event of a rebuild, listed buildings will have to be constructed using certain methods and materials and this can also affect both the cost and time taken to complete the work.
Another factor that impacts the time taken is the availability of skilled labour and it’s not unusual for firms to underestimate just how difficult it is to get hold of the qualified tradesmen needed. This forces companies to spend longer in alternative commercial accommodation and their insurance cover for the rent often runs out before the rebuild on their own premises is complete.
To help companies and residential property owners combat this problem, we’ve developed a buildings valuation service that gives you access to accredited professionals who’ll make sure the rebuild value on your policy is accurate.
The second big issue for underinsurance is around plant and machinery. When things go wrong you’ll need to replace your equipment quickly and that often means buying new kit instead of waiting for second hand items to become available.
This will add to the final bill but is often overlooked in the initial insurance calculations. There’s then the cost of transporting and installing the new machinery and again this doesn’t always get factored in to the sum insured.
The third area I want to highlight is business interruption and particularly the fact that the indemnity period on many policies is too short, while the cover itself often doesn’t go far enough.
In the wake of a major loss it can be difficult to get back to pre loss trading levels if competitors have grabbed some of your market share; you’ve lost a major customer; or your reputation has been damaged. But if your business interruption cover stops before you’ve regained your position then it’ll become even more difficult for you to do so without that financial support.
Often companies have to make upfront capital outlays to re-establish themselves and standard business interruption policies will let you spend a pound to save a pound on your final gross profit loss. But sometimes a bigger upfront capital outlay is needed to regain your pre loss position.
Your business interruption insurance will only pay for this if you have ‘additional increased cost of working’ cover. Similarly it’s worth considering specific customer and supplier extensions and to check that your insurance will pay out if an overseas trading partner is the cause of your business interruption.
The old adage that you only get what you pay for is very true when it comes to insurance, but please don’t find this out the hard way. Instead take the time needed to make sure your valuations and sums insured are up to date and accurate.
MRIB in Creating Certainty for our clients has effective and economic solutions to combat underinsurance so the product coverage is correct pre loss – vital for any company.