The challenging economic environment in the UK means that many businesses are at risk of being significantly underinsured at present. In fact, a September 2022 survey carried out by YouGov on behalf of one of our insurers, Aviva, revealed that out of 500 SMEs, a third (32%) don’t take inflation or supply chain issues into consideration when reviewing their business insurance.
This has been an ongoing issue since the pandemic. In early 2020 many business owners reduced their contents insurance due to staff taking equipment home, rather than it being kept in the office. Instead, businesses should have had conversations with their broker about reassessing their insurance as equipment was being kept in homes, cars and hotels, so it was still needed. As companies have resumed business in their premises, many have not changed their policy to reflect this and are therefore potentially underinsured.
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 underinsured to some degree.
The effect of underinsurance
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.
Real life cases
If a business needs to make a claim but their policy does not accurately reflect the current rebuilding value of their building, the insurer will again apply average, which will seriously reduce the amount of the settlement.
At Stanmore Insurance, we always recommend the client obtains a rebuilding valuation every three years to ensure the building has the correct sum insured. Unfortunately, there have been occasions where this hasn’t been sought or the client has advised them of a market valuation, which is very different to rebuilding. On one particular occasion following a fire, a client’s building was underinsured by 50% due to them advising a market value figure rather than a rebuilding sum insured and although the claim was managed through a cash settlement, the claim wasn’t easy to resolve.
Underinsurance for 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.
Underinsurance for 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 underinsured. 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.
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.
By Jackie Hyde, Owner and Managing Director of Stanmore Insurance and dot2dot Insurance