Did you know that 50% of UK businesses are underinsured to some degree, and 40% of policies with buildings have at least one premises suspected of being underinsured? Being underinsured can be as harmful as having no insurance at all. We have put together this simple guide to explain underinsurance and help you avoid the risks.
What is underinsurance?
Underinsurance is when the amount you are insured for (or a policy’s level of cover) is less than the actual value of the insured asset (or the cost of repairing, replacing or rebuilding it). In situations where you are underinsured, you will not receive full settlement of any claim. This is something that can be very costly for businesses; it could even lead to their closure.
- For example, let’s say you insured the contents of your business premises for £30,000, but the actual value of the contents is £40,000.
- In the event of a claim, insurers will only pay a proportion of the claim amount based on the level of underinsurance. This is referred to as “Average”.
- In this case, the contents are underinsured by £10,000 (25% of the actual value).
- In the event of a claim, insurers will reduce any claim payment by the same percentage. So, in this example, the maximum you are insured for is £30,000, but insurers will apply “Average” and reduce that maximum amount by 25% – a further £7,500.
- This means the most you will be able to claim is £22,500 against an actual value of £40,000, leaving you to make up the shortfall.
What causes underinsurance?
It is surprisingly easy for a business to be underinsured, so it is very important that you undertake periodic reviews and understand what to look out for. Here are some common ways in which businesses can become underinsured:
- The person responsible for effecting an insurance policy, underestimates the value of what the business owns, overlooks certain items or forgets about contents in less frequented rooms or on-site outbuildings.
- It’s essential to assess the value of the property’s contents and machinery based on the cost of an equivalent new replacement, not the used value, and to forecast the expenses of materials, labour, equipment hire, specialists, and waste disposal when estimating the rebuilding cost. Relying solely on the market value of the property can lead to significant underinsurance, as the market value may not accurately reflect the actual cost of rebuilding or replacing the property.
- Trying to cut the cost of the premium by undervaluing the business’ assets (something which definitely is not worth the initial saving if you later come to claim against it).
- Automatically renewing an insurance policy without checking all of theinformation and sums insured supplied is up to date, accurate and complete (for example, a business might acquire new high-cost items like laptops or bespoke machinery for tooling, but neglect updating the policy to include them)
Why should businesses be concerned about being underinsured?
Unfortunately, there are many problems that come from being underinsured. Almost all of them can result in significant financial loss to the business. Typical problems that come from underinsurance include:
Getting a reduced claim amount
If your business is underinsured and you make a claim, your insurer is unlikely to pay your claim in full. For example, if you were insured for £50,000 but actually needed to replace items to the value of £60,000, your insurer is unlikely to settle the claim for the full £50,000 because you have broken the terms of your policy. This would result in the business having to pay the shortfall between what the insurer gives you and the replacement cost of the items with a further reduction for “average” being applied.
Increasing your susceptibility to the average rule
The average rule is a principle used by insurers to reduce the amount of a claim if the policyholder is underinsured. It is their way of making up for the fact that you have underpaid your premium (because, if you had been accurate with your valuations, you would have paid a higher premium to cover that value). The shortfall can greatly exceed what the addition to the premium would have been.
Reduced or no pay-out due to misrepresentation
If policyholders purposely underinsure their assets to get a lower premium, it can have serious consequences if they come to claim and find that they are not covered for the amount they need. As well as the risk of being left out of pocket for the shortfall, they run the greater risk of the insurer avoiding the policy altogether due to misrepresentation.
Think you might be underinsured?
It is time to act. Remember, insurance is meant to protect you financially if something bad happens that is expensive to fix or recover from. Don’t take the risk of your business being underinsured.
Get in touch with us today on 02920 853788 or email us at contact@thomas-carroll.co.uk and speak to one of our experts.
