How to avoid being under-insured

As a business owner, we know that you have many tasks to plan, processes to deploy, as well as a supply chain or people to manage in order to remain profitable and efficient. This is why outsourcing some tasks and key priorities is essential to the smooth running of a business. As an independent Chartered Insurance Broker, our team know that insurance is a key purchase for businesses and getting the right amount of insurance cover is vital. Without the right levels of cover, an unexpectedly reduced claim pay-out could threaten the survival of your business. According to research, 80% of SMEs that suffer a major loss may not be in business 12 months later. To mitigate the risk of that financial loss, it’s critical you have the right cover for times when:

• Damage is caused to your property;
• Your employees or a member of the public sustain an injury;
• You damage or are responsible for someone else’s property.

Often businesses can fall into a trap of believing their insurance policies provide all the protection they need. However, being under-insured can cause many issues for you and your business. Often, the impact of under-insurance is not understood until it’s too late.

To ensure your business doesn’t run into problems like this, it’s important you review your policies year on year. Ravenhall Risk Solutions is a Chartered Insurance Broker, which means that we are held to a professional standard when arranging insurance to suit your needs. If you are concerned about your existing insurance arrangements or what’s being offered, we can provide advice and guidance to help you understand the basis of your policy and how sums insured can be calculated. Our team will help you purchase insurance cover that meets the needs of your business, or evaluate the effectiveness of your current policy.

When can under-insurance arise?

There are several ways under-insurance can occur. Often when assessing insurance arrangements, we evaluate the value of the risk you are insuring based on information which you, the policy holder, provide to us. Policyholders may arrive at this value from estimating the property’s current sale value or by making a ‘best guess’ at a building’s valuation. This can result in insuring the property for less than its rebuild value, as the cost to reinstate a building is often more than its market value. Understanding what a rebuild value is and how it can be calculated is critical to a business. It’s important that you provide us with comprehensive details of what is to be insured, to avoid any complications later down the line.

Effects of being under-insured

Any shortfall in a building’s sum insured can be reflected in a proportionate shortfall reduction in a claims settlement in the event of an insurable loss. This applies even if there is only a partial loss. This reduction in claim settlement is known as “Average”. A simple example of the application of Average is, if the true rebuild value of a building is £1,000,000 but it is only insured for £500,000, as it is underinsured by 50%. Therefore the amount of a claim payment by the insurer can likewise be reduced by 50%. In this scenario, the maximum claim settlement would be £250,000. As a business, it may not be possible to trade through such a loss.

What are and how to calculate Sums Insured?

Simply put, Sums Insured are the maximum amount(s) that can be claimed from your insurance policy. For buildings, in most cases, it should reflect the full rebuilding costs of the property including cost of materials, professional fees, labour costs, site clearance, etc. For residential properties, using a reliable valuation calculator like the ABI Public Rebuild Calculator ensures your readings are as accurate as you can be without employing the services of a professional valuer.

To avoid under-insurance, we recommend the following:

1. Remember: you are valuing the re-build costs not the market value of the building. This also applies to stock: the sum insured reflects the cost to replace the items, not the retail price.
2. Use credible valuation services to help correctly value your building.
3. Ensure you have sufficient business continuity plans in place to help your business recover after loss.
4. If new assets are purchased, this may affect the overall sums insured, so we strongly advise you to make your insurance broker aware of any new purchases immediately to ensure these can be added to your policy cover.
5. Liability insurance is an essential coverage for small business owners. Make sure that you have considered the risk of claims against you and check whether you have taken on any liabilities under your terms of business contracts.
6. Often, the risks to your business change year on year. As a business owner and policy holder, you are responsible for assessing whether new risks have emerged.

If you’re a customer with Ravenhall Risk Solutions or a policyholder requiring guidance on your insurance, contact our knowledgeable team – 0345 216 3000 or email enquiries@ravenhallgroup.co.uk