What happens if you're underinsured?

What is underinsurance?

Your premium is calculated based on your individual circumstances and the amount of cover you choose to take out to protect your business. Underinsurance occurs when you’ve not taken out the right amount of insurance cover for your needs. There will be a variety of factors to take into account when you assess how much insurance you need. If you’re not sure about this you should get advice from a broker or valuation expert because if that amount is wrong, it’s likely to impact the amount you’re paid for any claim you need to make.

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What does it mean if I am underinsured?

Taking out insufficient insurance cover will essentially mean any claim will be insufficiently covered.

For example, if the cost to rebuild or replace your property or contents is £100k but you have taken out insurance that will cover you for £50k, then you would effectively be underinsured by £50k or 50%. Any claim you make will only be paid on the basis of the amount of cover you chose, based on what is called the ‘average clause’ – so in this example your insurer would only cover 50% of any claim, no matter the size of that claim. This would leave you needing to pay the remaining costs yourself which could be anything from hundreds, to thousands, to millions of pounds.

How Do I Know If I’m Underinsured?

  1. you haven’t had your property professionally valued for insurance purposes in the last  three years

  2. you have altered or extended the property

  3. your insurance cover has been based  on the market value of the building when it should be based on what it would cost to rebuild your property

  4. you haven’t factored in costs for gates, fences or car parking areas in your calculations

  5. your property is a listed building – the time and cost of repairs/rebuilds are likely to be far greater than for an unlisted building, impacting your business interruption cover

  6. you haven’t factored in the costs of professional fees such as an architect or surveyor

  7. you haven’t factored in costs such as site clearance or access – particularly where your business might need, for example, a crane or heavy plant to help with remedial work as a result of a claim. This could also add time that needs to be taken into account for your business interruption cover

  8. you are carrying more stock now than when you took out your insurance policy

  9. you are now VAT registered

  10.  you have some new plant or equipment that you haven’t told your broker/insurer about. This could impact both the machinery cover you have and the business interruption you need – depending on how long it would take to source a replacement, if necessary

Claim Example – Material Damage

A hairdresser was carrying more stock than they had told their insurer they had. The figure they had provided was used to calculate the insurance cover. So when the business suffered a theft of more than £1,900 worth of stock, the owner found that the claim was covered but was based on an ‘average clause’ – i.e. it was paid based on the percentage of cover that was taken out rather than what the cover should have been. This left the owner underinsured by £900 and needing to find that money elsewhere

What is business interruption insurance?

Business interruption insurance should be added to the overall business insurance policy, providing cover for loss of income and helping the business get back on its feet financially. Whilst property insurance would look after the resulting damage of, say, a major water leak, the impact of such an event might leave the business unable to complete its schedule of orders. This is where business interruption steps in to cover loss in revenue.

Your business interruption insurance is based on an accurate assessment of the amount of time it would take for your business to recover from an event that impacts your normal operations – this is called the indemnity period. Making sure you have calculated this correctly is key to protecting your business income and cash flow until the business is running as it was before any event occurred.

The recovery process often takes longer than you think – even small, straightforward businesses often need longer than 12 months’ protection. For example, planning permission can often take months before any rebuilding works can even start.  If you need specialist equipment think about how quickly it can be sourced

Also, remember that if you haven’t traded for even one year, your customers will have gone elsewhere. So you will need time to rebuild your customer base and for your turnover to return to pre-loss levels. This should be factored in when calculating the length of time you want your business interruption to cover.

Having the right level of business interruption cover is really important and please contact us should you have any concerns regarding your current insurance arrangements.

Claim Example – Effect of Under Insurance on Business Interruption

A manufacturer had a fire at their premises and lost everything. When they took out their insurance they had decided that they could recover from any major event within 12 months and therefore had taken out business interruption insurance to cover them for loss of income for that period.

Unfortunately, although the repairs themselves were covered by property insurance, the extent of the damage and the specialist nature of their business meant that planning permission, repairs, the build time for machinery and time to regain lost custom would take three to four years. This was significantly longer than they thought when they calculated how long they would need business interruption insurance, meaning they were seriously underinsured.

So the company would need to fund the costs related to the loss of income themselves after the insured 12-month period. The estimated amount they were uninsured for was around £7-10 million – costs they simply could not carry themselves. Sadly, the business had to close with the loss of a number of jobs.