Are you at risk of being underinsured?

December 18th, 2018

A consequence of failing to seek proper advice or opting for the cheapest possible insurance quote often leads to many businesses leaving themselves underinsured.

A recent report suggests that up to 80% of UK commercial properties are underinsured and a further 40% of businesses fail to have the right business interruption cover in place.

Inadequate cover can seriously impact your business and leave you facing hefty costs in the event of an insurance claim, which could seriously damage your finances.

Being underinsured means that you don’t have the right level of cover to protect you in the event of a claim and there are three main sections of an insurance policy where policyholders often find themselves inadequately covered:

  1. Material damage
  2. Business interruption
  3. Liability

Material damage

This section specifically relates to your buildings, machinery, stock and all other contents and careful consideration should be given when setting these sums insured.  Many businesses make the mistake of giving their insurers the market value of their contents and machinery, whereas unless specifically agreed with your insurer, the sums insured should be the replacement as new cost, which is often considerably higher.

Buildings are also often found to be under insured because the sums insured have been estimated. It is recommended that a professional buildings valuation is carried out at least every five years.

In the event of a claim, where under insurance exists, insurers will apply “average” to the claim settlement. This is where they proportionately discount the claim payment in line with the level of under insurance. For example, if you insure all your machinery for £50,000 but its “replacement as new” cost is £150,000, you have only insured for 33% of its true value and so insurers will only pay you 33% of the claim. In some cases, if the under insurance is severe, insurers can avoid paying the claim altogether.

Business interruption

Business interruption cover is a core insurance requirement for any business as it supports the business whilst it recovers after an insured event (e.g. a fire or a flood) occurs. It is designed to pay the shortfall in profits which directly results from the original insured event occurring.However business interruption cover is a common area for underinsurance.

To arrange this cover you must give your annual ‘gross profit’ figure to insurers and the problem arises due to misunderstandings of the term ‘gross profit’. The definition of ‘gross profit’ for insurance purposes differs significantly from an accountant’s understanding of the term. As a result, businesses frequently declare incorrect figures, resulting in underinsurance.

Where underinsurance exists, insurers will apply average to the claim. This means that the business is not adequately supported during the recovery period and this can have disastrous consequences for any business.

Liability

Liability insurance is designed to protect you against claims from your customers, members of the public or your own employees.

When arranging the cover the onus is on you to choose an appropriate ‘limit of liability’, which is the maximum insurers will pay out in the event of a claim. However many businesses underestimate the cost of claims and can find themselves under insured.

For example many businesses will select a traditional Public Liability limit of indemnity of £1m however recent reforms to personal injury claims means that compensation payments are on the rise and compensation payments can easily exceed £1m. In these circumstances the policyholder would have to fund any amounts in excess of their limit of indemnity which can be crippling for a business.

What you can do

Arranging business insurance requires careful consideration. Sums insured, gross profit and indemnity limits need to be carefully considered and discussed at length with your broker to understand the future impact on your business. Of course price is important but arranging inadequate insurance can be more costly in the long term.

Here at Champion Insurance Brokers, we are committed to delivering best practice, by drawing on our industry knowledge and highlighting areas for consideration to allow you to set appropriate levels of cover for your business. We work closely with our clients to explain the terms and ultimately arrange optimum cover for your needs, ensuring that you and your business are adequately protected.

For more information, contact Champion Insurance Brokers today on 03330 430 430 or email info@champion-insurance.co.uk.


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