The recent Bushfires in Australia have brought Underinsurance into global news, as homeowners and businesses Down Under are realising the devastating consequences of not adequately insuring their properties.
Some estimates suggest that as many as 65% of affected homeowners might be underinsured*, which will have a lasting impact on many people, many of whom will be unable to rebuild their homes. It might seem that these issues are far from anything we are ever likely to face but the risk of Underinsurance is widespread across UK businesses and property owners.
What is Underinsurance?
Most recent research concludes that as many as 50% of UK business undervalue their assets to insurance companies, causing them to be underinsured**. If you get this insurance value wrong and it is lower than the real value at risk, although you might benefit from a cheaper premium, you will be penalised in the event of a claim, which could have a damaging impact on your business.
Most Commercial insurance policies contain an ‘Average Clause’, which allows insurers to proportionately reduce claim payments where underinsurance has occurred (this can apply to Buildings, Contents and Business Interruption covers).
How the Average Clause works
If a policy covering a building has a sum insured of £600,000 and at the time of a loss the true rebuild cost is £1,000,000 then the proportion of Average would be 60% (£600,000/£1,000,000).
Regardless of the size of a claim, insurers will then only pay 60% of any loss you suffer:
£50,000 Claim x 60% Average = £30,000
Shortfall = £20,000
Clearly, in this example, the cashflow and profitability of a business would be immediately affected by the underdeclared sum insured.
Why do businesses fall into the trap of Underinsurance?
Market Values vs Rebuild Values
Where buildings insurance is concerned, many policyholders declare the Market Value of their property and rely on this as being an accurate reflection of the rebuild cost. However, the only way to properly protect your assets is by declaring the value of the full cost of rebuilding the property (including any outbuildings), plus any extra charges that could be involved in rebuilding.
We recommend that all our clients obtain a RICS approved Rebuild Cost Assessment periodically to ensure that the rebuild value remains accurate. We can provide details of companies who can assist you with this.
When it comes to your buildings, the only way to be 100% sure that you are not underinsured is by having a formal Rebuild Valuation undertaken. In some cases, it might be enough to have a ‘desktop’ survey undertaken by a specialist, but for more complex buildings, it is best to get a surveyor onsite.
In some cases (where the Rebuild Value is less than the Market Value), a formal valuation can actually result in a premium saving.
Other factors that can affect the Rebuild Value:
- Your VAT status
- Type of property – if it has an unusual or specialist design, for example:
- Construction and materials
- Age and if it is ‘listed’.
Remember to adjust your cover when your needs change
Businesses continually adapt, improve and invest in their assets; if you get new machinery or technology in your building or if you extend or renovate the building, it can have a significant effect on the level of cover you will require. You should speak with your insurance adviser regularly to review the adequacy of your Sums Insured.
Don’t risk it for a cheaper premium
In some cases, businesses fall into the trap of insuring to a lower value to achieve a premium saving. Whilst a small saving might be achieved on day 1, a significant loss would likely cost your business thousands (and in some cases, millions) once the average clause is applied.
How can I avoid Underinsurance?
Speak to your insurance advisor! It is not just buildings that we need to think about when it comes to Underinsurance; the average clause will apply to Contents, Machinery, Stock and Business Interruption sections of your policy. At McClarrons, we work with you to discuss these issues and take steps to ensure that our clients are adequately covered.
Find out how we can help you further, here.
If you need any advice or your cover needs a review, contact the Commercial Team at firstname.lastname@example.org or by calling 01653 609151.