Inadequate cover presents a great risk to businesses – help ensure your cover is more than adequate by understanding how to prevent under-insurance and what the new Insurance Act 2015 means for your business and your insurance cover.

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What you need to know.

 

When it comes to business equipment, plant and tools cover you’ll find varying differences in the way in which assets are valued. Some insurers will offer cover on a new for old basis so you’ll want to ensure your figures and sums insured are accurate replacement values. Other insurers will provide cover on an indemnity basis which means putting you back into the position you were in before the claim. You may also need to factor in wear and tear when calculating your sums insured.

Insurance is a complex area for business owners and valuing plant and tools can often be tricky for the purposes of insurance. Often a major problem occurs while assessing the value of the asset for the purposes of insurance due to accounting practices. The value in the accounts will often not match the requirements for insurance due to accounting methods of depreciation and valuing of assets over time. You as the business owner or manager are therefore required to have some idea of the true cost of buying an equivalent piece of equipment and to will need to set your sums insured at that level.

The wider definition in insurance policy wording tends to be ‘Plant, Machinery and All Other Contents’. All other Contents include everything not more specifically insured as ‘Contents’. It doesn’t cover items that should be classified as buildings or stock. It also may not include computers and electronic equipment that are not part of plant, but it does include everything from stationery to desks and filing cabinets that are unlikely to have been capitalised. It may also cover tenant’s fittings like alarm systems, carpet tiles, partitions and mezzanine floors plus employee personal effects not more specifically insured. In other words ‘All Other Contents’ has a wide definition and the value involved in replacing them could be a significant addition to the value of plant and machinery.

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The Insurance Act 2015
Understanding under-insurance
Importance of getting your sums right
Calculate Business Interruption Insurance
Calculate sum of buildings cover
Calculate stock and contents
How much are your business equipment, Plant and tools really worth?

The Insurance Act 2015 was finally introduced and written into law on the 12th of August 2016. With its introduction come a number of reforms for a variety of important areas which cover the legal framework of insurance contracts. The act aims to bring about fairer and more balanced remedies but does also lay out a number of responsibilities to both the insured and insurers.

Are you making a fair presentation of risk?

The act introduced ‘Fair Presentation of Risk’ which requires policyholders to disclose material circumstances that are known to them and also what they as decision makers within their business ought to know.

The act states that:

• Policyholders should give sufficient information so as to put a prudent insurer on notice that it needs to make further enquiries.

• Burden of disclosure stays with the insured however insurers and in turn brokers are required to take a more proactive approach to enquiries into the policyholders business.

Introduces Fairer Remedies

• Reckless or deliberate breaches could result in the insurer voiding the policy and keeping the premium.

• An insurer could take the same action that it would have taken had a fair presentation of risk been made at the time of taking out the contract, but only if the breach is deemed to be neither reckless nor deliberate.

• If the insurer would not have provided cover if the material facts were originally made available they can void the policy but the premium must be returned.

• A proportionate remedy could apply if the insurer would have offered different terms had the policyholder made a fair presentation of risk. The insurer can in these situations opt to treat the contract as having been entered on those different terms and in cases where a higher premium would have been charged, they can reduce any claims paid in proportion to the amount that has been under paid.

 

Learn More

The Insurance Act 2015
Understanding under-insurance
Importance of getting your sums right
Calculate Business Interruption Insurance
Calculate sum of buildings cover
Calculate stock and contents
How much are your business equipment, Plant and tools really worth?

As a business you’ll want to ensure your cover reflects the true replacement value of any stock, equipment or buildings. We’ve put together three examples to showcase the effects of under insurance.
 

Case One: Business Interruption case at a hotel

 
A case of under-insurance was discovered when a hotel suffered a total loss following a fire. Following the disaster the insurer commissioned a valuation of the hotel where the sum insured was set at £1million. The true cost to rebuild the property was found to be £2 million with an estimated timescale for the rebuild of two years. The hotels policy had a maximum indemnity period of 12 months for business interruption insurance, meaning the business would only be covered for the first 12 months of loss of gross profits.

For the buildings and contents the business was found to be under-insured by 50%. Under The Marine Insurance Act 1906 the insurers would have only been liable for 50% of that part of the claim, in turn they would have paid out £500,000 towards the claim. Following the introduction of The Insurance Act 2015 a new set of fairer remedies were introduced. So in the circumstances above the insurers would firstly have to consider the premium they would have charged had they had the correct sums insured. Once calculated under the “Proportionate Remedies” insurers can reduce the payment by the difference in premium. In this case there was found to be a 30% increase in premium, consequently the claims payment was reduced by 30% meaning the client received £700,000.

In the case above The Insurance Act 2015 has meant the client has received a fairer settlement as a result of their miscalculation.

 

Case Two: Buildings and contents cover at a service station

A business owner operating an independent service station suffered the devastation of having to close their business due to a theft involving ram raid. The thieves ploughed their van into the property in order to loot the shop and make off with the cash machine inside. The property damage was extensive, resulting in the business closing completely for a period of 9 months. While there were no issues with the business interruption portion of the claim, with the business having a 24 month indemnity period and accurate gross profit sums insured, the business was found to be under-insured for its contents due to recently having a new EPOS system installed amongst other improvements such as new refrigerator units and shelving. An under-insurance figure of roughly 30% was discovered on the contents claim.

After investigation by insurers it became clear that the client renewed their policy just one week after investing in their business and increasing their stock and contents sums insured. During the renewal process the broker clearly asked whether there were any changes to the business or amendments in sums insured, the client responded that there were no changes to be made and everything was to remain the same. The renewal conversation was recorded and used as evidence to show the policyholder had deliberately and recklessly under insured themselves. Resulting in the insurers cancelling the policy, keeping the premium and not paying the claim; leaving the client significantly out of pocket and without insurance.

 

Case Three: Residential Property Damage from Cannabis Factory

 
When a property owner in the South East of England let her house out to tenants, she certainly wasn’t expecting what was about to happen. Her tenants had turned the property into a cannabis farm with extensive damage caused to the property including the re-routing of mains wires and damage caused to numerous interior and exterior walls. Following the issue with the nightmare tenant the policyholder entered a claim with their insurer.

It was then established that during the renewal process the policyholder was asked whether they had been convicted of any crimes within the last 5 years. The policyholder had in fact been convicted of a crime just 3 months prior to renewing the policy, and was in turn found to have deliberately withheld the information from the insurer who would not have offered the cover if this fact were presented at time of renewal. In this case the claim was not successful with no monies being paid out and the insurer returning the premium to the policyholder. With no ability to claim for the damage the landlord was left severely out of pocket.

 

The right cover and the right sums

 
Get the right cover and ensure you’ve calculated your sums correctly making sure your business is protected sufficiently beyond just compulsory basics. Ask yourself if you are not insuring some aspects of your business because you want to save money, thinking ‘it won’t happen to me’. When the unthinkable happens like a burglary, natural disaster, machinery breakdown or even a tax investigation, it could cost many thousands of pounds for the sake of saving a few hundred.

Learn More

The Insurance Act 2015
Understanding under-insurance
Importance of getting your sums right
Calculate Business Interruption Insurance
Calculate sum of buildings cover
Calculate stock and contents
How much are your business equipment, Plant and tools really worth?

The contents sum insured (excluding stock)should reflect the total value of machinery, plant, equipment, furniture, shelving, racking and all other contents at the insured’s premises. Stock items are the goods or products sold by a business in order to generate revenue. The stock sum insured should represent the value of all stock and materials in trade belonging to the insured, or for which they are responsible. The stock sum insured should reflect the cost to the insured to replace the items and not the retail price. When setting the sum insured, consideration should be given to the maximum value at risk during seasonal or other peak trading periods

If you’re a stock holding business, you’ll find that stock is the Life-Blood of your business, as without it there can be no sales and without your sales there is no income, so ensuring your stock and in turn your income is a critical step you won’t want to neglect. Depending on the type of business you’re in, you could well have a wide array of products held as stock with these at constant risk from unforeseen disasters such as theft, flooding or fire.

Stay up to date

Are you regularly reassessing your businesses needs during the lifetime of the policy and at time of renewal? Think has your stock or stock levels changed? For example you may have introduced a new line of products. Are you buying in more stock, or less?

Consider how your business might have grown since the policy started, if you’re now doing considerable more business this can have a knock on effect within your business in terms of your stock and contents.

Perhaps your business has changed in terms of the different services you offer, perhaps you started off in a shop and now require insurance to cover deliveries as well. Or perhaps you’ve moved from a home office to a dedicated retail unit. In both cases those types of changes would not be covered under the current policy and would require an update to the policy or a new policy in entirety. You should be vigilant and regularly be aware of any changes to your business and what affects these could have on your current insurance coverage.

Learn More

The Insurance Act 2015
Understanding under-insurance
Importance of getting your sums right
Calculate Business Interruption Insurance
Calculate sum of buildings cover
Calculate stock and contents
How much are your business equipment, Plant and tools really worth?

It is critical for you as a business to ensure the sum insured for buildings represents the full rebuilding cost of the property and not just the current market value. When considering the rebuild cost you should look to consider: the cost of materials, current labour costs, associated fees such as those for surveyors and architects, costs involved with the clearing of the site.

Building sums insured should also include, but not be limited to, the following if you as the insured party have responsibility for them these include but are not limited to:
• tenants’ improvements
• landlord’s fixtures and fittings,
• walls, gates and fences,
• small outside buildings, annexes, gangways, conveniences and other small structures,
• extensions communicating with the buildings,
• roads, car parks, yards, paved areas, pavements and footpaths security cameras and lights
• fixed fuel oil tanks and fixed diesel tanks, piping, ducting, cables
• wires and associated control gears and accessories and extending to the public mains.

Great consideration should be given also to the type of construction as well as the method of construction necessary to rebuild the property. You may find for example, that if the property is a listed building that the cost of materials needed is greater along with the time and labour required to rebuild the property.

Getting a recent professional valuation for insurance purposes is recommended as this will provide an accurate assessment of the rebuild costs. Under insurance is prevalent and is most commonly found in buildings policy covers, so it’s important that you have the correct sums insured so that your business is fully protected in the event of a loss or damage.

Learn More

The Insurance Act 2015
Understanding under-insurance
Importance of getting your sums right
Calculate Business Interruption Insurance
Calculate sum of buildings cover
Calculate stock and contents
How much are your business equipment, Plant and tools really worth?

Business Interruption cover helps ensure business continuity following an insured incident, so getting the right cover is crucial. We’ve put together a list of 9 steps you can follow to ensure your Business Interruption policy will provide adequate cover when you need it most.

What Is Business Interruption Insurance?

Business interruption insurance – also known as time loss, consequential loss and loss of profits insurance – provides cover for any financial losses caused by an interruption to business practices. This may be due to material damage to property, or the premise in which you typically operate from. For example, imagine your office gets severely damaged by a fire. Apart from physical damage, you may also suffer from a loss of business income from which to pay business expenses and make a profit. Then there’s the costs associated with renting alternative premises. With Business Interruption Insurance, all of this would be covered, and you wouldn’t have to fork out for these expenses.

A step by step guide

1. Calculate and set the length of indemnity period needed for your business. As bad as it sounds, you’ll need to think and imagine the worst-case scenario. This will help you draw an accurate picture of the length of time needed for your business to return to normality. When assessing the time needed you’ll want to consider a variety of factors, such as building regulations and necessary permits.

2. Add an estimate of the time needed to retrain vital staff and the lead time in obtaining new equipment. Financial experts usually recommend a minimum indemnity period of 24 months.

3. Calculate the expected gross revenues of the business over the indemnity period. Project the past 12 to 24 months of your fees or sales forward, depending on the business, over the indemnity period. Adjust your calculations depending on whether your business expects to grow or decline and for expected inflation rates.

4. Calculate the expected gross profits of the business over the indemnity period. This equals expected gross revenues minus expected changes in inventory values, business material use and freight costs.

5. Calculate the costs of moving to and operating your business from other temporary premises during the indemnity period. This may apply to local trades people such as hairdressers, plumbers, electricians or small office-based businesses such real estate agents or business intermediaries. Include rentals, equipment hire, payroll, employee benefits, workers compensation and other employee allowances for staff at the temporary premises.

6. Calculate the expected saved expenses of your business during the indemnity period. These are expenses which will not be incurred because of the property loss. They include maintenance costs, building services and utility bills.

7. Check the lease agreement with your business landlord to determine if you are liable for rental of the building even if it is demolished during a loss-making event. If so, estimate the rentals over the indemnity period.

8. Calculate expected payroll for staff who will not be employed during the indemnity period. This includes the sum of wage costs, employee benefits and workers compensation insurance. Add this figure to the saved expenses.

9. Add the figures for gross profits and, if applicable, moving costs and continuing rentals. Deduct the expected saved expenses from this figure. This is the sum needed for business interruption coverage, which you should purchase from your selected insurance provider.

Key factors you’ll need to understand

Gross Profit
Understand that for the purposes of Business interruption insurance, the gross profit calculation differs to that you might find in accounting. While in accountancy gross profit is understood to be sales minus cost of production, most business interruption policies will follow the following calculation for gross profit.

Indemnity Period
When calculating business interruption sums insured on an annual basis they must be increased accordingly if an indemnity period greater than 12 months is selected. In most circumstances, a minimum indemnity period of 24 months should be considered for SMEs to take into account site clearance, design and planning applications, rebuild time, replacement of plant and machinery, sourcing stock and rebuilding the customer and supplier base.

Uninsured Working Expenses
Uninsured working expenses are costs or specified expenses that vary directly with the level of trading, i.e. they will decrease in direct proportion to the turnover in the event of a business interruption. As these costs will no longer be incurred as the turnover reduces, there is no need to reimburse them, as such they are called ‘uninsured’ working expenses. One major uninsured working expense for a small business would be purchases such as components, raw materials and goods for re-sale. Other uninsured working expenses could also include: postage and packaging costs and commissions owed.

What Are Optional Extensions With Business Interruption Insurance?

When it comes to Business Interruption Insurance, a standard policy will usually only cover losses as a result of your own premises and property, but not that of your suppliers or customers, if applicable. However, your business may be affected by such damage and therefore it’s always worth considering these extensions when it comes to choosing your policy:

  • Losses resulting from damage at the premises of your suppliers.
  • Losses resulting from damage at the premises of named customers.
  • Losses resulting from damage to your property while in transit.
  • Losses resulting from access to an insured premises being prevented due to damage to nearby premises.
  • Losses resulting from damage at the premises of a public utility.
  • Losses due to the occurrence of a disease, vermin, defective sanitary arrangements, murder and suicide.

Life is full of unexpected twists and turns, but you shouldn’t have to suffer because of it. To learn more about what our Business Interruption covers, please don’t hesitate to get in touch with us today.

What Are Typical Business Interruption Exclusions?

Though each policy differs, typical exclusions to be aware of with any Business Insurance policy include:

  • Riots or civil commotions.
  • Risk of war.
  • Radioactive contamination/explosive nuclear assemblies.
  • Pollution or contamination.
  • Corrosion.
  • Rust.
  • Changes in temperature, wind or rain damage to movable property.
  • Risks related to motor vehicles, watercraft, aircraft, livestock or buildings in the process of being built.

Think your business could benefit from a Business Interruption policy? Wondering what else it could cover? Then please don’t hesitate and get in touch with our specialist insurance experts today who can provide you with a range of competitive quotes. We have partnerships with a whole host of top-rated UK insurers, so we’re sure we can find the right policy for you.

 

Learn More

The Insurance Act 2015
Understanding under-insurance
Importance of getting your sums right
Calculate Business Interruption Insurance
Calculate sum of buildings cover
Calculate stock and contents
How much are your business equipment, Plant and tools really worth?

Under-insurance occurs when you don’t have enough insurance, or for example the amount insured is insufficient to cover possible losses. For example the costs of rebuilding your business premises may be more than originally declared or you may have incorrectly totalled the sum of your stock and contents.

Under-insurance can lead to disastrous consequences down the line, with inadequate insurance cover held by the policyholder potentially resulting in economic losses to the policy holder, since the claim would exceed the maximum amount that can be paid out by the insurance policy. According to BPP 80% of properties are under-insured and 40% of businesses lack adequate business continuity cover. For small businesses in particular this can be troublesome, as small businesses tend to be more susceptible to going out of business as a result of a claim.

Increasing your insurance cover to a level that’s adequate for your business won’t cost the Earth, and you’ll be better for it in the long run, with the true cost of under insurance only ever felt when you need to make a claim.

Let’s face it; the potential for a slightly lower premium is far outweighed by the potential loss arising from a claim which involved under insurance. Under insuring simply doesn’t make sense for any business.

If you own your own business premises than that is likely to be one of your if not the most valuable asset. Your business may also use equipment that is vital to the work you do, if you’re a tradesman you need your tools and a shop needs it’s stock so think, insuring these for less than what it would cost to replace them or rebuild makes about as much sense as trying to insure a Ferrari at the price of a Skoda. You might get away with it initially but at some stage the gap in cover is going to come back to haunt you.

If you have significantly under-insured your property, contents or stock your insurer would be within their rights to pay only part of any potential loss as you’ve only insured for part of the properties worth.

Common causes of under-insurance

• Difficulties with estimating what it costs to rebuild a property

• Your insurance policy may be old (more than 3 years) and you may not have updated the level of cover needed

• You may have completed renovations which increase the value of your home.

• Rolling over insured sums year on year, without addressing economic and business factors.

• Underestimating the time it would take to recover following some form of interruption with business interruption cover.

• Making erroneous assumptions regarding the necessary sums to be insured.

• Clients not keeping sums insured under review from year to year.

• Not taking into consideration the fact accounting and Business interruption definitions for gross profit vary.

• Customers deliberately trying to pay the lowest premium possible with little care for actual insurance needs.

• Clients willingness to buy insufficient cover and ‘take a risk’

• Underestimating the costs for rebuilding the property, not keeping informed of rebuilding costs, all the while some cities have seen double digit inflation in that respect. Price of labour, materials and other costs should also be taken into account.

• Not considering whether sums insured at the start of the policy will be enough during the policies full entire.

How to prevent under-Insurance

Most people only read their policy when they need to make a claim. Unfortunately, by that time it’s often too late. Check your policy now to see how much your insurer will pay and under what circumstances and get to grips with what might lead to your insurer rejecting a claim. When working out how much cover you need, you need to consider the worst happening, for example, a fire completely destroying your place of business.

The under-insurance checklist

1. Read and make sure you understand your Terms of Policy (ToP) and policy documents.

2. Identify the types of risks you are exposed to, the likelihood of these risks occurring and their potential impact. Councils and emergency service authorities can help you identify risk in your area and outline local plans and recommendations for each risk.

3. Re-asses your sums insured regularly, the sum you have insured now may no longer be adequate in 6 months time.

4. Have you rolled over sums year on year? Consider how you business has grown, shrunk or changed over time.

5. Have you considered the conditions and limitations on the policy? You’ll find these in the Warranties section of your policy documents.

What Happens In The Event Of a Claim, If Your Under-Insured?

In the event of a claim, most people will have one of the following terms within there policy documentation wording; “Subject to Average” and / or  “Proportionate Remedies”. These clauses are designed to prevent false claims being made and help identify fraud. To help, The Insurance Octopus have broken down a brief summary of what these clauses mean, should you find yourself under-insured and in the middle of a claim.

Proportionate Remedies: is an action that an insurer can take when a policy holder fails to take reasonable care.

The Insurance Act 2015 (see link below) means insurers can take a proportionate approach in the event of a claim, rather than not paying any compensation at all. In essence the insurer can reduce its claim’s settlement amount. For example, had the insurer known the correct information regarding the risks they could of increased the premium by 20%, therefore giving them the right to reduce the final settlement figure by 20%. Had the policy holder provided the correct information of the insured asset, the insurer would have paid out in full.

Subject to Average: The term ‘subject to average’ (AKA average clause) means that if the sum insured at the time of the claim is less than the actual value of the insured asset or item, the insurers have the right to reduce the final settlement figure by a percentage, subject to the value of the asset against the amount insured. For example,  you under-insure your asset by 50%, insurers then have the right to reduce the final claims payment by 50%.

In the event of a policy holder being determined to have deliberately and recklessly provided incorrect information, or misleading facts, the claim may be rejected entirely and / or could result in the policy being cancelled.

Learn More

The Insurance Act 2015
Understanding under-insurance
Importance of getting your sums right
Calculate Business Interruption Insurance
Calculate sum of buildings cover
Calculate stock and contents
How much are your business equipment, Plant and tools really worth?