Fire, theft or flood. You would expect to receive the full amount that you have insured for, wouldn’t you? Ideally, this is how it should be if you are correctly insured. However, millions of UK SMEs are underinsured which means that in the event of a claim you may have to self-fund to get your business back on track.
WHAT? Tell me more!
This is how it works…
You have insured your machinery, plant and contents for a sum insured of £80,000.
You suffer a fire at your premises, and your loss here totals £50,000.
The total replacement cost of your machinery etc. should be £100,000. Insurers apply what is known as Average to the claim…
The claim settlement will be £40,000, and you will be out of pocket by a £10,000. Ouch! That’s maybe a new pallet wrapper. Insuring on the correct basis is likely to only cost you a small amount more plus any potential claims are settled quicker, and your business is back up and running faster.
Raising the Roof
It is estimated that 80% of commercial properties are underinsured by up to 60%. Yes, you read that right, 60%! This could have serious consequences for your business – not just as the owner of the property, but it can also affect you if you are the tenant.
Say the building is insured for £600,000, but the actual rebuilding cost is £1,000,000.
A major fire occurs, and the damage looks to be in the region of £500,000.
Average may well apply which means the claim payment is reduced by a massive £200,000.
That’s the cost of a replacement roof – could you or your landlord afford to pay for that? Where does that leave you and your business?
Following the Insurance Act, many insurers have removed the ‘Average Clause’ from their policies. However, you still have a duty to make a fair presentation of risk to the insurer, and I think it remains to be seen how they treat claims where underinsurance exists.
Top Tips on How To Avoid Underinsurance
- Use a professional surveyor to assess the correct reinstatement value of your buildings and repeat the exercise at least every 3 years. Many insurers will waive the average clause if you provide an up-to-date valuation.
- Tell your insurance broker if you alter or extend the property.
- Listed properties require special considerations. Often a specialist insurer is the best option here – ask your insurance broker.
- Insure your contents including machinery and plant on a replacement as new basis and include commissioning, installation and transportation.
- Be aware of how currency fluctuations could affect your sum insured – this is particularly important following Brexit.
- Keep an inventory/register of your contents (enter your details below to get your free template).
- Accountancy gross profit and insurance gross profit are different. Do NOT use the Gross Profit figure from your trading accounts. Make sure you understand how the insurance gross profit should be calculated.
- 24 months should be the minimum indemnity period under your business interruption cover.
- Stock sums insured should include raw materials, work in progress, finished goods. Don’t forget to make allowances for busy periods or if your business is seasonal.
- Use an insurance broker!
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