As part of our New Year resolution tips we tackle underinsurance. Many businesses find themselves underinsured at a time of loss and only receive a fraction of the true value of a claim.
It is thought that up to 80% of the UK’s commercial properties are underinsured and 40% of businesses underinsure their business interruption cover. Are you paying too much for the wrong cover?
1. Main causes of underinsurance
A major reason for under insuring is when an assured fails to carry out regular valuations/assessments. Setting sums insured and indemnity periods requires consideration of a number of different factors, and there is no substitute for professional valuations and advice. But the value of insured items and circumstances of a business will not remain static; it is important that repeat assessments are regularly carried out to ensure sums insured and indemnity periods remain adequate.
For example, the cost to reinstate a building can change significantly from year to year. Material and labour costs are in constant flux, legislation can require additional design considerations, and planning authorities can dictate alterations to the building and its site. A failure to update sums insured to account for such changes can result in a significant financial shortfall in the event of a claim.
2. Policies most likely to suffer
Property is most susceptible to underinsurance, with business interruption similarly problematic. Customers need to be aware of the interconnectivity between different classes of business, and the knock-on effect of any of these being underinsured. For example, if a building is underinsured then a policyholder will need to source additional funds to account for the shortfall in claim settlement. This can delay reinstatement and prevent a business returning to pre-loss activity levels, therefore exposing the adequacy of the levels of business interruption cover purchased.
In the absence of regular reviews and valuations, it is easy for underinsurance to become present in a customer’s insurance arrangements.
3. Focusing on price
In many renewal negotiations the key focus is price. Many customers fail to see underinsurance as a major risk and may inadequately insure items to maintain lower premium levels.
Our approach is to reflect on the reason for purchasing insurance. If the reason is to achieve adequate compensation in the event of a loss, then the sums insured must be correct or the product will not achieve the desired outcome.
The consequences of underinsurance can be significant and rectifying the situation may cost less than you think.
In the event of a loss underinsurance may be an issue and this can cause a conflict between the customer and their broker.
Whilst not expected to calculate the figures on their customers’ behalf, brokers have a legal duty to explain to customers how to correctly set sums insured and take steps to ensure they fully understand policy terms.
5. A broker’s role
The continued prevalence of underinsurance presents a real problem. Particularly when customers are increasingly going down the route of using non-advised insurance sales, through online platforms.
We see the issue getting worse but by educating customers on the dangers of underinsurance, and advising on how to avoid it, we seek to demonstrate the added-value of using a quality commercial insurance broker over non-advised sales/online products.
6. Case Study
Ascend were asked to review and quote for a Commercial Combined policy which included Employers & Public Liability, Office Contents and Computers. The previous policy had been purchased online, several years prior when the business where at a different premises.
The business had outgrown the previous office and relocated to new offices, staff numbers had increased from 5 to 30. While insurers had been advised of the new location, no consideration had been given to reviewing the levels of cover. There were 6 serious areas of concern:
– Office contents were insured for £10,000, true value was over £100,000
– No laptops were insured, there was £50,000 of laptops requiring cover in the office any anywhere outside the office on a global basis.
– Estimate for wageroll was vastly incorrect
– No professional indemnity cover
– Incorrect geographical limits
– Incorrect public liability cover
Ascend addressed these areas and ensured the client had the correct levels of cover. Had the cover not been updated, in the event of a claim the compensation received would be inadequate and possibly cover declined due to non-disclosure.
to find out more please contact Matt Price, Broking Director Ascend Broking Group Ltd
01245 449 060