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.
Say you insure your contents for £10,000 but really your contents are worth £25,000 and a fire does £5,000 worth of damage. Your insurer may have the right to reduce the payout in proportion to the level of under-insurance. In this case, there might be a payment of only £5,000.
Common causes for 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.
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.
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.
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?