How SMEs can avoid being underinsured

Insurance companies base their premiums on, among other things, the value of the risk they are insuring which is usually based on the information a policyholder provides. If, at the time of a claim, this amount is found to be lower than the assessed value at the time of the loss then the insurers may seek a proportionate remedy to put them in a position they should have been in when accepting the risk. This might result in more premium being charged or different policy terms applied or a reduction in the claim payment (which in some policies is called a condition of average).

Top tips to avoid being underinsured

Use professional valuation services to help you decide on your sums insured – useful information can be provided by your broker or insurer or via http://abi.bcis.org.uk or www.rics.org/bcis. Regular valuations will help ensure that you don’t end up underinsured.

Getting the numbers right when you buy your insurance policy will help avoid any inadequate sums insured becoming even less suitable year-on-year.

Sums insured for buildings should be based on the cost of rebuilding not the market value – particular features of your premises might affect the cost of reconstruction.

For business interruption consider buying declaration-linked insurance because it provides an uplift of 33%, providing that the sums insured and period of indemnity are both correct initially and declarations are made when requested by insurers.

When looking at business interruption insurance remember that accountancy and insurance policy definitions of annual gross profit are different. To avoid being underinsured, make sure your assessment of gross profit matches the one in your policy.

When thinking about an indemnity period for business interruption covers, remember that 24 months is likely to be the minimum period needed for a business to fully recover its trading level and to rebuild its customer base

Checking documentation is always a good idea; many insurers will make every effort to draw your attention to the important conditions of your policy but it is always important to check to make sure there are no errors.

Disaster recovery or business continuity plans may help you recover after a loss.

If you buy a simple online package policy check that the liability limits of indemnity, business interruption indemnity periods and other standard policy limits are sufficient.

Liability policies are complex. Make sure that you have considered the risk of claims against you and check whether you have taken on any liabilities under your terms of business contracts.

New risks sometimes emerge. Consider how the risks to your business change, including areas such as cyber risk or data protection.

The costs of claims preparation, such as the costs of instructing an expert or an accountant to help with the claim are not usually included in your insurance cover and may be costly; discuss with your broker whether you need to buy additional insurance to cover this.

For a free appraisal of your business insurance, please call a member of our commercial team today.

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This article is a summary of a report produced by BIBA. For the full report, please click here

Please note: This article does not purport to be a comprehensive analysis of all matters relevant to its subject matter. The content should not, therefore, be regarded as constituting legal advice and not be relied upon as such. In relation to any particular problem which they may have, readers are advised to seek specific advice. Further, the law may have changed since first publication and the reader is cautioned accordingly.