Put simply, underinsurance occurs when the amount that you have insured for is too low. Your insurance premium is calculated based on your individual circumstances and the amount of cover you choose to take out to protect the Buildings, Contents and for businesses covers such as Business Interruption. Underinsurance occurs when you’ve not taken out the right amount of insurance cover for your needs.
As margins and budgets are squeezed, businesses can be driven by price over quality of cover, when it comes to insuring, correct valuations for instance are not necessarily prioritised fearful that it may lead to higher premiums.
The problem for many businesses is that getting the right sums insured can often be complex and the values in question can change quickly. For insurance to fulfil its objectives, the cover you purchase needs to accurately reflect your business requirements. Insuring assets for incorrect values, or setting cover limits too low, is likely to result in underinsurance.
Watching this short video could save you thousands of pounds in the future and explains underinsurance in a simple way.
You can also use the Association of British Insurers online calculator http://abi.bcis.co.uk/ to get an indication of your property’s value, obtaining a professional valuation though is a much safer approach.
At Real we have partnered with a specialist RICS surveyor, we can arrange Buildings insurance reinstatement valuations for both you and your landlord.
How could this affect your business premises?
It’s the Landlords responsibility to ensure adequate buildings insurance is in place for your premises – but how do you know whether the building has an adequate sum insured?
Do you rent the building? Have you asked your Landlord when was the last time they had a building reinstatement valuation carried out? Does the buildings policy have temporary accommodation cover? Does your lease have a break clause in the event of a loss/non-rebuild? It is worth checking these aspects and to note in your business continuity plan.
Don’t forget that its your business and if your landlord isn’t correctly insured it could have an impact on your business.
How you insure your business contents is also critical, it should always be remembered that when providing a sum insured for your business machines, computers and other business assets that must be done on a replacement as new.
Underinsurance at home
It is not only businesses that are affected by underinsurance. It’s easy to under-estimate the value of your home contents, it is advisable to create a list which includes everything from furniture to curtains, televisions, laptops, garden furniture, bikes, clothes, carpets, art and wine. It is also advisable to have an up to date rebuild valuation of your home.
How can you become underinsured?
To put this into perspective lets look at a simple example. If the cost to rebuild or replace your property or contents is £100,000 but you have taken out insurance for just £50,000, then you would effectively be underinsured by 50%, this would mean in the event of a loss such as a fire or theft for instance, the amount the insurer would pay is just 50% of the loss.
Sound unfair? Well if you have insured for only half of what you should have done then you will only be paid half of any claim. This is just an example that we have used 50% or half just to indicate how it works, this is referred to as Average. Almost all insurance policies have what is called an “Average” Clause.
A general misconception is that when a loss occurs that the insurance company will just give you a cheque to the value of what insurance has been purchased, this is not the case.
Seek professional advice
Leading UK insurer Aviva have reported that on average 77% of the properties their appointed valuers survey are underinsured by 45% of the correct insurance.
The truth is, sadly, you only know the true value of insurance in the unfortunate event of a claim – and unfortunately that point could be too late, and completely ruin your business and the livelihood of the people you employ.
If you had to make a claim and were underinsured, this would leave you needing to pay the remaining costs yourself which could be anything from hundreds, to thousands, to millions of pounds. Don’t forget when making decisions about insurance it’s essential you check whether the cover is appropriate to your needs from a specialist insurance broker.