The Dangers of Underinsurance

We’ve all had the occasional average day but, when it comes to insurance, “average” is just about the last word you want to hear.

Particularly if you’re in the midst of a burnt out building worrying about how you are going to rebuild, not just the building, but your business and the livelihoods of your employees.

Finding out that the average clause will apply means that your challenge just got tougher. Much tougher.

Put simply, the average clause applies when the sum insured on your policy is insufficient to achieve the reinstatement of your premises as new (this is underinsurance).  And perhaps the most important thing to remember is that you, as a business, are responsible for setting that sum insured.

Fortunately help is available from your insurance brokers and other professional advisers.

Firstly, it’s the job of your insurance broker to ensure that you are aware of exactly what you are covered for and what your sum insured should cover.

It’s often easy to think that you know how much your premises cost to build, particularly if they are new. However, in the event of a claim, other costs have to be taken into account.  First and foremost is the cost of potentially demolishing the remains of a building and clearing the site.  Then there are the costs of professional fees, the fees incurred in engaging architects and surveyors to plan your new building.  There may also be costs involved in submitting your new plans for planning permission.

All this before you have even laid a spade in the ground.

These costs can often add at least 15% to the costs of a building project and they can only be properly assessed by regular surveys of the premises by a qualified surveyor.  Even then, it’s important to let the surveyor know that the purpose of the survey is for insurance reinstatement.  The difference between a market valuation and an insurance valuation is often quite a lot. It’s key to get this right to avoid falling into the underinsurance trap.

It’s also very important to note that the definition of buildings often includes items like gates, fences, car parks, underground services so they all have to be factored in to the sum insured.

While the chance of having to make a total loss claim on your business is small, it’s very important to understand that the average clause also applies to partial losses. So even if you have a smaller loss and you’re underinsured, you can expect that proportion of underinsurance to be deducted from your claim.

So if you haven’t had your premises revalued in the last three to five years, the time to act is now. Rebuilding costs change over time and can also be regional in nature. An accurate, properly instructed survey by a qualified professional is the best way to avoid an “average” day!

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

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This blog was written by David Findlay, Commercial Account Executive in our Shrewsbury branch