The pandemic, safe spacing regulations and the end of government financial support has caused businesses to struggle. Many SMEs (small to medium-sized enterprises) have been tempted to reduce their cover, cutting a range of insurance policies, and becoming dangerously underinsured.
19% of SMEs have stopped paying for business interruption insurance. This is a negative and dangerous decline as it could mean many businesses will not receive financial support; for example in the event of a fire or flood and the business was unable to operate for some time afterwards.
To learn more about business interruption insurance, read our information here:
As well as why you should not be considering cancelling your business interruption policy:
Not fully insuring your business by reducing your cover, which offers a cheaper option but has a far greater degree of financial risk, is called underinsurance. We explain the extent of underinsurance and how it should be avoided:
What is underinsurance?
Underinsurance means your business risks are far greater than your policy covers. A building may only be worth £200,000 but rebuilding it could actually cost significantly more. You should be insured for the reinstatement value, not how much the building would be worth if you sold it.
If you are underinsured at the point at which you make a claim, the condition of average will come into play. This is a rule that calculates what payment you will receive.
The “average” means your insurer will pay only a certain percentage. This percentage is calculated as your Sum Insured (the amount you are insured for) divided by the Accurate Valuation (the correct value of your property). The insurer will only pay that percentage of your claim, minus the policy excess.
So let’s say you have insured a building for £500,000 yet the valuation stands at £750,000. £500,000 is 66% of £750,000 – meaning the insurer will only pay 66% of any claim (minus the policy excess).
The more underinsured you are, the more you will have to pay out yourself should you need to make a claim.
How does underinsurance work?
If you do need to make a claim, and you are found to be underinsured, you may find your insurer unwilling to pay the full claim amount – if at all.
You can be underinsured for several different types of insurance:
You may think your building or property is worth a certain amount – but you may be surprised to learn that it’s worth a lot more once you start trying to buy it “as new”. Insurers want to know reinstatement and rebuild figures – not the amount you bought your property for.
Think about your indemnity period – this is the length of time it would take for your business to get back on its feet. Most businesses will require two years to get back to their “reasonable normal” – which is the level of trading following a period of interruption. Make sure your policy will cover you for the amount of time you need, so you aren’t left underinsured should the worst-case scenario happen.
Physical copies of your data or vital business information need to be protected. Not taking out data or cyber insurance means you won’t be insured for what that data or information is worth. That’s why many insurance policies stipulate businesses must keep separate copies of their important documents elsewhere, such as away from the business premises.
The vehicles and transport used by a business is often essential to its operation. Not updating your fleet insurance alongside new technology or undervaluing your vehicles puts businesses at risk of paying very expensive sums in reparations and damages. Vehicle modifications without informing your insurer or broker can also lead to underinsurance and being in potential violation of your insurance policy.
Why are businesses underinsured?
There are several reasons as to why businesses may be underinsured. Businesses may not be aware of the specialist cover they need, such as cyber or terrorism insurance. They may assume that a standard policy will cover them for incidents caused by unusual circumstances. However the small print of their policy may tell a different story.
Where as, some businesses may knowingly be underinsured to achieve a lower premium. This is not advisable. Businesses who see premiums skyrocket may try to find sneaky routes to bring the cost down. There’s no winning scenario here. Underinsurance puts businesses at a serious risk of paying out on extortionate claims.
Or, a business may miscalculate the cover they need. They may not take into account increases in gross profit, seasonal increases or reinstatement values.
Underinsurance vs uninsured
Being underinsured doesn’t mean you’re uninsured completely. Your insurer may still pay out – but you won’t receive the full amount you need to rebuild your business.
Being uninsured means you haven’t explored the option of insurance with a broker or insurer. If an accident or incident happens, you won’t be covered at all – you’ll be left paying for every ramification yourself.
Underinsurance means your insurer will penalise you for not adequately insuring your risk. You haven’t declared the full risk, and the full premium hasn’t been paid. Hence, you won’t be provided with the full pay out.
You should always aim to have fully comprehensive insurance in place.
Underinsurance case study
One of our clients is a wood manufacturing company. They had recently bought a new second-hand machine for £50,000. Unfortunately, they did not realise that to buy the machine “as new” would have been £250,000. This amount needed to be declared to the insurer as, should the client need to make a claim, the insurer would value the machine at its “as new” price.
The client had also miscalculated its Business Interruption gross profit. It needed to be calculated from the year ahead, including all staff wages, to ensure an accurate sum would be paid out in the event of a claim. Our client had declared the sum for the previous year and, taking into account business growth, it simply wouldn’t have been enough.
The company used our services and fortunately we were able to help them declare an accurate representation of their risk. The insurer now knew the “as new” value of the machine, and the manufacturer’s gross profit estimate.
When a fire caused catastrophe less than six months later, our client was relieved to receive a full pay out from the insurer. Without our intervention, they would have been left significantly underinsured and would have had to foot the bill themselves.
Brokers are invaluable to businesses. We get to know your business, assess your risk and analyse your policy. We find the best, comprehensive cover for an affordable premium. Peace of mind that, should the worst happen, you will be able to rebuild your business.
ARE YOU UNDERINSURED?
Our expert brokers can help you to accurately set your Sum Insured. We’ll get to know your businesses and fairly assess your risk, negotiating a comprehensive policy with insurers. When you work with specialists, you have peace of mind that you’ll be covered if the worst-case scenario does happen. Why not get in touch with our team?