What is under insurance?
Underinsurance occurs when the sum insured for your property, or insured assets, is less than their rebuild or replacement value.
Underinsurance has been around for a long time, and it is incredibly common. According to research carried out by Rebuild Cost Assessment Ltd1, around 83% of commercial properties are under insured, both inside and out and on average, underinsured buildings are covered for just 66% of the amount they should be2. They estimate that underinsurance total for all UK commercial properties currently stands at around £375 billion3. Failure to conduct regular valuations was given as the most common reason for this.
So what does this mean for you as a commercial property owner? Simply put, you are at considerable risk of getting substantially less than you expect when making a claim, and possibly a prolonged and damaging claims dispute with your insurer..
Underinsurance can cause a serious financial crisis, or even precipitate bankruptcy, depending on the asset that is insured and the extent of the shortfall in insurance.
Being underinsured can have devastating consequences on your business. The ramifications of being underinsured don’t just hit you as the policy holder, they affect your business and your creditors.
What are the factors that are driving policy holders to underinsure?
A tough economy and harder business conditions, with less liquidity means businesses may seek to save money on premiums and obtaining up to date valuations, on a policy that may never be called upon. However it is false economy.
Insurance is not always seen as a front-line business cost, rather more it being viewed as a nuisance cost, one which business or property owners are reluctantly obliged to pay. In addition, there is a lack of awareness or understanding of the application of the Condition of Average clause within policies.
How should it work?
Businesses, property owners and landlords, should declare the true up to date value of assets or at a greater value, (I.e. be over-insured or insuring within a permissible range). If you do this as the policyholder, then you can expect to fully recover your costs and there can be no complaint by the insurer since the insurer has charged their premium based on the correct sum(s) insured.
Policies are ‘subject to average’ or ‘condition of average’, which means that if the sum insured does not represent the value of the property or equipment insured at the time of loss or damage, the insured policy holder is to be responsible for the required proportion of the insurance and bear a part of the loss accordingly.
Simply put, it means that you don’t receive a full insurance payment when you have only paid part of the premium. If you are underinsured by a value of say 20%, then any subsequent claim, even partial claims valued at less than the total sum insured, will be reduced by the same percentage, i.e. 20%. You will only get the same proportional value for repair or replacement even if the claim is much lower than the total sum insured. So under the Average Clause, insurers are entitled to reduce the amount paid out in a claim by the same proportion as the amount of underinsurance.
So if the sum insured doesn’t represent the value of the property at the time when the loss or damage is sustained, then the policy holder will effectively have to cover that proportion of ‘undervalue’ and so bear a part of the whole loss.
How can you protect yourselves?
The common misconception is that business owners think they have cover up to a certain level so they will be guaranteed to be indemnified by insurers to the full value of this sum when they make a claim. But as can be seen above, this is not always the case.
Are your insured sums adequate and have they been revisited recently?
The best way to assess the rebuild value of a property is to consult with a Chartered surveyor such as rebuildcostassessment.com. The valuation on your buildings policy has little or nothing to do with the market value of the building. Buildings should always be insured for the amount it would cost to rebuild or reinstate them, NOT their market value. It is important to take into account any outbuildings within the boundaries of the property and include the cost of debris removal and surveyors. Many factors affect the accuracy of this figure, such as the method of construction used, and whether the building is Listed or not.
Contents, plant, machinery
If you bought equipment second-hand and insured it on that basis, could you afford to replace plant and machinery with brand new equivalents should second hand not be an option?
Would a more specialist cover be better, for example, in the case of computer equipment? Is your asset register up to date and do you know current replacement costs? Bear in mind assets which in themselves are inexpensive, but in volume terms have a big impact. The replacement cost of a large quantity of hand tools or office equipment for example, can soon add up.
Have you recently purchased new plant or equipment and failed to notify your insurer?
Have you recently acquired more stock which needs to be added to your policy?
It’s a good idea to do a regular audit of your insurance to make certain you have enough cover – especially when your annual renewal’s due. It is important to ensure that all figures are correct and that all assets have up-to-date valuations. Go through each of your policies and take a realistic view on whether your level of cover is enough to allow for a worst-case scenario.
Many buildings insurance policies will not include aspects such as, removal of hazardous materials, contaminated land, fixtures & fittings, soft landscaping, excavation, replacement or stabilisation of land under or around the property, or temporarily supporting or protecting any damaged structure.
Most policies provide cover on a reinstatement basis so would make no allowance for upgrading or improvements, referred to as ‘betterment’ that may be incorporated in the redesign of the property.
You need to consider:-
• Would you be fully covered for a commercial building rebuild?
• Have you factored in costs for outbuildings, car parks, driveways, site clearance etc.?
• Is your building listed (and hence more expensive to rebuild)?
• Has it undergone any alterations or been extended?
Get a RICS report
Having a RICS report will put you in a strong position should any dispute occur, as it is an insurance industry trusted assessment source.
Note that any cost to rebuild assessment will only be valid at the time of assessment and you should make provision for inflation or the Retail Price Index (RPI). This will normally be part of your insurance arrangement. However the inflation provision can take many forms, you will need to check this with your insurance broker or insurer. It is your responsibility to ensure you arrange adequate levels of cover for your buildings on an ongoing basis. Should you make any significant changes to your property that you believe could affect the Rebuild Cost, e.g. an extension, mezzanine floor or new outbuilding then again you should contact your insurance broker or insurer, who may recommend you obtain a revised Rebuild Cost Assessment.
Our community broking experts are on hand to advise
We work with you to ensure that you have considered the risks to help us assess the cover required ensuring that it is appropriate for your needs. We take time to understand the nature of your business and understand your insurance demands and needs. We talk to you in plain English about and specific conditions and subjectivities imposed by insurers and your obligations within the policy so that you fully understand the terms and conditions thereof.
Speak to our experts about comprehensive commercial combined, property and other insurance protection at competitive prices.
Get in touch with your branch if you are worried about underinsurance or just want to have a review.
Health & Wellbeing is a trading name of the Medical Insurance Advisory Bureau Ltd which is authorised and regulated by the Financial Conduct Authority. Registered in England No: 7217140. Registered Office: Affinity House, Bindon Road, Taunton, Somerset TA2 6AA. Lloyd & Whyte Group Ltd do not undertake regulated activities.