Underinsurance comes in many forms. It generally describes when cover is purchased that is insufficient to fit your insurance needs. Should a claim occur, this becomes an issue as the insurer may not pay out enough to cover the costs. Underinsurance is incredibly common. According to the Chartered Institute of Loss Adjustors (CILA) 43% of businesses Business Interruption policies are underinsured, with an average shortfall of 53%. As you can imagine this can be a huge problem should a catastrophic claim occur such as a fire in a building. It could leave the insured needing to pay large sums of the rebuild cost of the property.

Although underinsurance can occur on any type of policy, today we are going to focus on Buildings and Business Interruption policies.

Buildings

The buildings sum insured for a property refers to the cost of rebuilding the property if it was completely destroyed including demolition, removal of debris, local authority and professional fees. When calculating the building’s sum insured people often use various estimated figures such as the property value or even just a guess to conclude this figure. On top of this, the same figure is often used for many years through renewals and not adjusted for scenarios such as inflation or rises in labour or material costs. A good example of this is through this past year the cost of wood has risen dramatically leading to higher building costs.

The best solution to this is to seek a formal valuation from a professional source such as the Royal Institute of Chartered Surveyors (RICS). They can provide you with an accurate figure from the current market standpoint. It will also be important to note that most valuations do not include VAT which should be discussed with your surveyor as it is often included in the Buildings Sum Insured.

Business Interruption

Business Interruption provides the insured with cover to meet the business’s income requirements to continue to operate in the event that it is halted by situations such as direct physical loss or damage. The income requirements should be projected using the past 12 – 24 months of fees or sales over the indemnity period, with adjustments to your calculation if you believe your business should grow/decline and include inflation rates. It is worth considering this carefully as underinsurance in this scenario can lead your business to be underfunded and unable to maintain staff or even operating in its entirety if this value is too low.

When deciding on this figure most business owners turn to their company accounts; however, there are a few things to bear in mind. The first is Gross Profit: In accounting terms, gross profit is usually shown after the deduction of purchases with staff and utility costs stripped out of it. For the purposes of insurance, these need to be included to avoid unwanted surprises and underinsurance. The second is the Indemnity period. In most circumstances, it is advised to use an indemnity period of at least 24 months to account for the plethora of steps you may need to get through to get your business back up and running.

Overall, we recommend contacting an insurance broker who can advise and put you on the right track to avoid underinsurance. This blog post only scratches the surface of the types of policy and reasons for underinsurance, so it is definitely something to watch out for. We are always here if you need us for advice!

https://www.cila.co.uk/cila/downloads/sig-downloads/business-interruptions/files-9/13-bi-policy-wordings/file