Insurance is calculated on a ‘new for old’ basis, which essentially means that although businesses may have the same equipment as last year, the market value has increased and they should therefore adjust their policy accordingly.
According to Aviva’s report, 44% of UK businesses claimed to make significant changes to the way they operated during the pandemic, yet only 20% updated their insurance cover. They estimated that as a result, up to 50% of UK businesses are currently under-insured to some degree.
The Effect of Under-insurance
It is essential clients insure their building and contents to full value. If this doesn’t take place, they are at risk of not receiving a full settlement, should a claim occur.
For example, if a business insured their contents for £20,000 and they are really worth £40,000, then the insurer will apply average, resulting in a reduced settlement of £10,000. Many businesses neglect to fully insure their computer equipment as they believe only one item can be damaged at any one time. However, if there is a fire in the building and all contents are destroyed, then the cover will clearly be inadequate.
Some organisations do not consider reinstatement costs, which can be a significant blow if you consider how inflation is having a dramatic effect on any item that needs to be insured.
Brokers are becoming increasingly concerned about businesses who are being selective on what they tell their insurance advisor. The advisor is unable to complete their role properly and provide quality insurance cover if a client doesn’t provide all the information needed. Insurance advisors can work with a client to determine what risks they want to cover themselves to help reduce costs, but they need all the facts.
Businesses Who Own Premises
So, how do you know if you are underinsured? The first step is to assess your building’s reinstatement value, and keep doing so at regular intervals. Your insurance broker will inform you what is required in order for a reinstatement value to be accurate and will also be able to recommend a provider who values buildings specifically for insurance purposes. Due to the significant issues with inflation and the lack of rebuilding valuations being undertaken, unfortunately building sums insured are becoming a major concern.
It’s important to note if you are not VAT registered then VAT must be included as part of the building’s sum insured. As VAT is at 20% this is a significant amount that could be omitted and would again have an impact on any claims settlement.
Businesses Who Are Renting
For any business that leases a building, then the building’s insurance is generally covered by the landlord. However, you may be surprised to hear that you need to study your lease when you are arranging your insurance cover.
For example, if you have made improvements to the buildings you occupy such as adding partition walls or have added a new kitchen, then it is highly likely you are responsible for insuring this. You are also usually responsible for any internal redecoration of a building that you lease.
All the above falls under Tenants Improvements insurance, so firstly check your lease and understand your obligations. Then check whether this is included as part of your insurance portfolio. If it isn’t included then there is a huge hole in your insurance protection.
We recommend asking your landlord when they last had the building valued on a reinstatement basis. If it is a number of years ago then the likelihood is the building will be under-insured. If a claim occurs, then you could be without a building for a significant length of time and this could have a dramatic effect on your business.
Preventing Under-insurance
All businesses should be regularly updating their insurance policies as the business grows and changes alongside the economy. It is important to contact your insurance broker if changes occur such as adding new contents/machinery or adding a new business activity, so your policies can be adapted accordingly.
On the other hand, if your business is struggling, your revenue may be set too high on the policy and can be adjusted to help reduce costs. As your business changes and adapts, your insurance policy should move with it.
We recommend reviewing your insurance policy at least annually to make sure it is still accurate. You may only need to make one small adjustment per year, but that change can ensure you are covered in the worst case scenario.
