Putting the right business insurance in place is crucial for any business in case the unexpected happens and you’re left facing a large claim. It’s easy to look at insurance premiums and take the cheapest option to save money in the short term, especially in a difficult economic climate.
Yet this can lead to a false sense of security, meaning that your business is under insured when it comes to making a claim.
Getting your sums right
It’s important that you value your business correctly before you take out your insurance policies. For example, the rebuild cost of your premises is usually very different to the market value, so you need to make sure you’re covered for the right figure – a Building Cost Information Service (BCIS) survey in 2012 showed that 80% of commercial properties were under insured.
Similarly, most policies will replace equipment and machinery on a ‘new for old’ basis, which means it’s important to have an up-to-date list of your assets to ensure they’re all covered for the cost of replacing them at today’s prices, or else you’ll find yourself out of pocket.
A common issue leading to under insured is the different interpretation of gross profit between insurers (turnover minus stock purchases) and accountants (usually excludes the cost of things like staff and utilities, too). Another is the ‘Application of average’ where if you have only insured your business for 80% of what it should be, insurers will only pay out that percentage of any claim, even if it’s under your coverage limit.
So, you might have business contents cover for £80,000 but they’re actually worth £100,000. Even if you only claim for £20,000 your insurer would pay out 80% of that, or £16,000, leaving you to make up the 20% shortfall. And if you have cover for business interruption, does it protect you for long enough to get your company back up and trading to the same extent as before your claim, for example if you had fire or flood damage to your premises?
It is also important to bear in-mind that many insurance policies will only cover you for 12 months, when your business could be interrupted for significantly longer if you face planning delays or procurement difficulties. Which means your claims period could end before the rebuilding is complete.
How to avoid under insurance
Firstly, business insurance brokers will be able to talk you through the right level of insurance for your business, so you’re covered for the right amount without paying extra for insurance you don’t need.
Although not obliged to calculate the figures for you, brokers are there to help and explain the key terms of insurance. Secondly, you also need to work out the Total Cost of Risk (TCOR), which includes your business insurance premiums, direct and indirect costs, and risk management expenses, to help you avoid under insurance if you need to make a claim. Again, your broker can help you here.
Lastly, keep your broker or insurer informed of any changes to your circumstances, such as growth in your business or significant increases in stock on your premises (especially at Christmas), so you’re covered for the right amount all year round. And update your buildings insurance valuation every two to three years, as the cost of rebuilding can change significantly over time.