We recently attended an industry trade show as an exhibitor for one of our specialist product areas.
We though having a competition would be a good idea, but it had to be fun yet have a serious side to it as well. We decided that the theme for the show would be around underinsurance.
We asked visitors to the show to guess the correct rebuild sum insured of some garage premises, whilst many took part in the competition it was a little scary to find that although most people have heard of underinsurance very few actually knew how it worked and what was even more worrying was that only one visitor tried to work out what the correct sum insured was by attempting to work out the m2 of the building.
Almost all other entrants hadn’t got a clue and most just had a go at guessing. Whilst the competition centred around their commercial/business premises, with many commenting that it didn’t really apply to them as they rent the premises the concept of underinsurance still applies to their Home Buildings and Contents.
Read on and decide for yourselves whether you could be underinsured, but just before we move on, consider this, having arranged surveys with one of our industry partners, just over the last six months we have found all other than one to have been underinsured, some by a significant amount.
What is underinsurance
When you buy insurance cover for your business premises or your home for example you must ensure that the amount that you are insuring for must be adequate to fully rebuild or in the case of your business contents or indeed home contents that the amount is enough to replace the item lost due to say theft.
If you insure for less than the true reinstatement or replacement cost, then in the event of a claim you could find yourself underinsured.
Underinsurance occurs in very simple terms when the cost of a claim is more than the amount that the item(s) have been insured for.
An example of underinsurance
Let’s take a small manufacturing business where the building has been insured, it’s a small industrial unit built of brick and block construction with a tiled roof, essentially a typical modern building. Buildings insurance has been taken out for £150,000 when in fact the correct rebuild cost is nearer £300,000.
In simple terms in the event of a claim at the premises the building is underinsured by half, so lets take that example apart.
The insurance has been bought at £150,000, following a storm there is significant roof damage and the cost to repair the damage is £25,000.
The insurer agrees that the cost to repair the damage to the roof is correct at £25,000 however there is a problem. Following the damage to the roof a Loss Adjuster was appointed, these are usually an independent company which works on behalf of the insurance company to ensure that the insurer is paying the correct amount in the event of the claim. Its been noted that the correct amount to insurer the building should be more like £300,000
The insurer agrees to pay the claim but only for half the amount, in this case £12,500 less any excess that there might be.
In this example we can see that the building should have been insured for £300,000 but unfortunately it was only £150,000, therefore half underinsured so the amount the insurer would pay is half the amount of the claim.
This is a very simple example and in real life it can be a little more complex, its essential therefore that the correct cover is taken out at the start of the insurance policy.
Why am I underinsured
There are many reasons this occurs, lets take a look at a few, and don’t forget whilst we are applying these examples the same can apply to the business or home contents.
Purchase price – When buying insurance the amount was based on the purchase price. There is still a misconception that the amount insured for is the purchase/sale value of the property.
This would easily fail because the value of a property in central London for example would be valued at a much higher figure than many other parts of the country.
The rebuild cost however would be very similar.
Guestimate – The sum insured is a guestimate, this is also likely to fail, unless you are a surveyor it’s going to be unlikely that the figure you arrive at is going to be correct, the rebuilding of the premises is more than just the bricks and mortar.
The local builder – don’t forget that the cost of the rebuild is much more than the physical building, when a surveyor provides a rebuild cost they are also taking into account professional fees such as architects, local authority, and in the event of a larger claim there may be demolition and site clearance costs.
Do it yourself – yes we have come across these and if anything it comes under the guestimate definition above, the chances of you getting it wrong are going to be quite high.
How can I avoid being underinsured
The answer is quite simple, employing the services of a professional surveyor who will take into account all the aspects of the rebuild cost.
As an insurance broker we can arrange a survey on your behalf at much less than the market rate. Speak to us about this on 01623 889530
Can my contents be underinsured?
Just like a building, your business contents as well as your home contents can be underinsured.
Many people in business look at the contents value the way an accountant would, that mans that as the years pass the value of the item gets less due to wear and tear. This is great in one respect but certainly not when it comes to insurance
For insurance purposes this is not the case though, the basis of how a claim is paid on contents in simple terms is no different to how a claim would be paid on a building, underinsurance can still occur.
How is underinsurance avoided on business contents.
Always remember that the amount to insure for on business contents is the amount to replace or reinstate the item lost to do the same function.
Sometimes this can be quite tricky to achieve because a machine that is 10 years old may no longer be available, it will have been superseded many times. The amount that we will use here is to replace that machine “AS NEW” to do the same function.
Over all when calculating the amount to avoid being underinsured is to take the replacement cost of all items as new.
Things not to do.
Base a figure on current sale price or special offer, it would be inevitable that the special offer wouldn’t be available should you have a loss six months down the line.
Base the figure for office equipment on auction prices, whilst you might not want to replace as new but you would be happy to pick up a filing cabinet for a few pounds, in the event of a loss the new price would still be used.
Decide that you wouldn’t want to replace an item in any case, this would still be taken into account if there was a loss potentially rendering you massively underinsured if the item has a high replacement value.
Take a guestimate on price, this seldom ends well. Hand tools from certain makes can be very expensive, these are accumulated over a long period of time and prices can soon become out of date.
Remember the amount which you insure for must always be on a replacement AS NEW VALUE* to ensure that you are correctly insured and have a sufficient sum insured should the worst happen.
*There are ways to correctly insure for items that would be replaced on a like for like basis excluding wear and tear but this needs the correct advice.
Speak to us about getting your insurance correct, don’t be underinsured, let us get the best rates and prices for you on the correct basis. Getting it right might cost a little more in premium, the amounts though are insignificant against what it could cost you or your business if you are underinsured.
Don’t guess, speak to us soon.