How to combat commercial underinsurance

Underinsurance in the SME market remains a big issue, especially in the wake of the recent revisions to the Ogden tables. In addition to business owners deliberately trying to reduce premiums, there are a few mistakes that we have outlined below to consider in combating possible underinsurance issues.

Business Interruption

One of the main issues is underinsurance in business interruption, with indemnity periods being inappropriate and way too low compared to what is ultimately required.

There are still many businesses out there with only 12 months business interruption cover, as opposed to the 24 or 36 months that that should have. A 12-month indemnity period may be insufficient for some business’ in terms of being enough time to get trading back to normal levels prior to any loss.

Often, even just the time, effort and expertise required to pull together a business interruption claim is hugely underestimated. This can take up a lot of valuable management time if a qualified loss assessor has not been budgeted for. Use of an experienced assessor will significantly reduce this time and allow management to concentrate their efforts on getting the business back on its feet.

Many businesses also make the mistake of looking at historic accounts rather than forward projections when it comes to calculating business interruption cover. Though it is hard to predict, it is important to establish the growth of the business over time and to forecast what will happen over the indemnity period.

Liability Insurances

Underinsurance is not just restricted to property and business interruption. Changes to the Ogden rate, which sets out payment levels for catastrophic injuries, may also have a huge impact on underinsurance. Many insurers are currently considering if the traditional £10m limits on employer’s liability and £5m on public liability are now adequate.

The 3.25% change in insurance pay-outs for such serious life changing injury claims can mean the difference of going out of business if you are left underinsured. It is therefore important for all businesses to re-assess their current liability limits for Employer’s, Public and Products liability insurance.

Property valuation

Common reasons for underinsurance are things like making no provision for foundations, gates, and parking areas or considering compliance with local authorities which can all increase costs. Amendments to building regulations have also seen a dramatic rise in rebuild costs with required improvements in energy performance, greater fire protection, improved drainage and accessibility all contributing to the overall problem.

Often underinsurance is the result of companies not regularly reviewing their requirements and rising costs. In many cases insurance is not looked at until the month before it is due for renewal and often then it is simply re-insured at the same level. It is important to undertake regular valuations as even in a slow economy property prices rise and replacement costs soar.

Many business owners do not realise the true value of their property and assets and so it is therefore wise to work with an experienced broker who can arrange regular and realistic valuations. Insurance policies are also concerned with the rebuild cost of a property and not the market value. Insurance Brokers such as Bluedrop Services understand your industry and keep up with any relevant changes that may affect your business, keeping you ahead of the game.

Over the last 12 months there have also been significant increases in inflation with building materials, components and imported equipment rising dramatically. It is important to be aware of this and for insurance values to be readjusted accordingly.

The problem is that underinsurance doesn’t just affect a total loss claim. An underinsured risk can be subject to the average clause, which can be applied to a partial loss claim meaning that the claim pay-out could be less than the loss incurred.

Property valuations do not have to cost a lot of money and often if there are no significant changes in the interim since the last valuation then a simple desktop valuation can be considered, but it is good practice to bring the valuations up-to-date. Fluctuations in exchange rates and political events, such as Brexit, all affect the correct valuation of your commercial property.