Why trying to save money on your sums insured can be a costly exercise..
Underinsurance in the property market was underlined by research carried out by the Building Cost Information Service, part of the Royal Institution of Chartered Surveyors in 2012. It found that 80% of commercial properties are underinsured.
Similarly, the Chartered Institute of Loss Adjusters found that 40% of business interruption policies are underinsured with the average shortfall being 45%.
Within the commercial property sector, underinsurance has always been an issue when fixing a declared value for the risk to be insured. The most common reason for underinsurance is a failure to conduct regular valuations. The valuation should be for the whole risk, not just the building itself. This can include walls, gates, fences, security lighting, cameras and fire protection devices.
Some businesses are underinsured by more than 50% and on average, across all sectors the level of underinsurance is 20%.
Businesses also need to fully understand the type of insurance that is in place. Reinstatement cover will replace old for new while indemnity cover will pay out the market value of the property at the time of the loss.
Unfortunately, if you are underinsured at the time of a claim, the insurer will apply the average clause. Average works by reducing the amount of the claim by the same amount of underinsurance, for example:
Computer equipment is insured for £5,000 and a theft occurs and the equipment is stolen. If the correct value of the equipment is actually £10,000 insurers will consider that the client has only insured that equipment for half of the risk. Therefore, they will reduce the claim payment by a half. The initial £5,000 claim would be reduced to £2,500, less any policy excess.
It is important that businesses work closely with their insurance provider to avoid the potential of this happening. As a rule, we will assess this on a regular basis with our clients, to ensure that the sums insured are sufficient for their needs.