Could your charity be underinsured?
The pandemic and the resultant hit to the economy has forced businesses to look at every cost to make savings and insurance is no exception. A major worry is that vital protection could be sacrificed for relatively small premium savings, making businesses more exposed.
Recent research undertaken by Aviva indicated that, on average, the last time organisations undertook a review of their insurance valuations was two and a half years ago. The research also showed that two thirds of organisations have adapted their business models because of the national lockdown, however, worryingly, 90% have not made any changes to their insurance covers. Changes to be considered should include cyber cover, as a lot of work and business has now gone online, and business activities may have changed, stock limits may have altered, and more equipment may have been purchased.
A huge risk to an organisation arises if its activities have changed, with insurers not being updated, as claims may be reduced or declined.
What is the impact of underinsurance?
A claim for damage to buildings or contents could be reduced if you do not have adequate amounts of cover. The same applies to claims for consequential losses following a buildings claim (charity interruption cover).
The correct buildings cover is the total cost of rebuilding your property. The figure should include a cost for debris removal, professional fees (such as architect and surveyor fees), materials, labour and, where applicable, VAT.
What can you do about it?
The best and only accurate way to ensure you have the correct sum insured is to appoint a surveyor to calculate your ‘rebuild cost’. Get a professional surveyor to visit your premises and produce an insurance valuation report. Some insurers offer this service for free, or at a reduced rate, for their charity customers. This is not the only way, however. There are also desktop valuations on offer from RICS qualified surveyors. These reduce time and also avoid face-to-face meetings which is ideal given the current circumstances.
A very key point to note is that often a rebuild sum is very different to the value of the property. The value could be higher or lower than the cost of rebuilding your property, due to the land it’s on and the materials used.
An up-to-date inventory (asset register) is the best way to calculate the correct amount of sums insured for contents and equipment, with the cost of replacing all items as new.
Some organisations, rather than insuring for the full amount of their contents, decide to insure for the amount they think could be lost in any one claim. For larger charities, with multiple locations, this may be appropriate when a more bespoke policy is arranged. However, for most charities, this approach is simply not appropriate and could put them in financial danger.
What could happen if our charity is underinsured?
Some organisations have mistakenly believed that as long as the amount of any claim they suffer is within the sum insured all will be fine. Sadly, this is not the case. This is due to the vast majority of charity insurance policies having an ‘average’ clause. This clause details the proportional reduction in a claim payment if a claim is made but the sum insured is not adequate.
Take a charity with a community centre, for example. The correct building sum insured is £1,000,000, but they decide to insure for £600,000. The community centre suffers from flooding which leads to a claim of £200,000 to repair the damage caused. Because the charity decided to under-insure by 40%, the claim payment would also reduce by 40%. Instead of receiving the £200,000, the charity would only receive £120,000, leaving the charity to find £80,000 to complete the full repairs. Average clauses generally apply to all material damage and consequential loss cover (i.e., buildings, contents, equipment and business interruption).
The risk may not stop there. It is the duty of trustees and officers of a charity to ensure that the charity they act on behalf of is properly covered. A claim may be made against the trustees if they negligently do not correctly cover the charities assets.
Contact us today for a full review of your insurances to make sure that your charity is correctly covered and to discuss how you can be certain your charity is not underinsured.
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