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.
The Insurance Act 2015
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?