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Perils Of Underinsurance

August 20, 2013

Too many businesses are risking their survival and making it difficult to bounce back successfully from a major claim.

A significant problem is underinsurance and brokers and their clients need to work together to ensure that when a loss occurs the insurance policy will respond effectively and get the business back on its feet as quickly as possible.

If property and contents sums insured are only 85% of what they should be, then insurers can apply that percentage to the claim settlement. This ‘application of average’ can see underinsured businesses face a shortfall in their insurance claim and leave them with an unexpected and often sizeable bill.

The widespread nature of underinsurance in the property market was underlined by research carried out recently by the Building Cost Information Service, which is part of the Royal Institution of Chartered Surveyors who found that 80% of commercial properties are underinsured.

The problem for many businesses is that getting the right sums insured is often complex and the values in question can change quickly.

When it comes to business interruption, for example, the definition of gross profit is not consistent between insurers and accountants and this can immediately lead to problems. Businesses also tend to underestimate how long it will take to get back on their feet and the standard business interruption indemnity period of 12 months is simply not enough.

Underinsurance is also a problem for plant and machinery because the lead times for machinery is often longer than expected. Also when plant is coming from overseas the impact of currency fluctuation also has to be factored into the equation.

Brokers should be working closely with their clients to make sure risks are properly assessed and valuations are up to date. Even if the sums insured need to be increased or indemnity periods extended, the impact on the premium is often less than imagined.

Once a claim is being made it is too late to avoid the negative impact of underinsurance and this is why it is so important to get the sums insured correct at renewal.