Insuring your business premises is essential to protect your livelihood and give you peace of mind; but what happens if you declare your building, stock or contents to be worth less than it actually is? Whilst deciding the value of your property may seem simple enough at first glance; the process often requires more thought than you might expect. In this guide you’ll find out what underinsurance is, the risks surrounding it and the steps you can take to avoid it.
What is underinsurance?
In a nutshell, underinsurance occurs when the values stated in your policy do not reflect the requirements of your business. For example by declaring that your building is worth £250,000 when it is actually worth £500,000. Underinsurance is not exclusive to buildings insurance however and it could also apply to covers such as business interruption, tools insurance and business contents.
It’s a common misconception that an insurance policy will pay a claim up to the value declared by the policyholder, regardless of whether that value was noted accurately. However in this scenario insurers can apply sanctions such as the condition of average or request an additional premium. Both of which could potentially leave you out of pocket and put your business at risk.
What are the risks associated with underinsurance?
- An insurer may apply the condition of average in the event of underinsurance. If this condition is applied, a claim will be proportionately reduced based on the amount the policyholder has underinsured by.
- An insurer may request an additional premium; so that payment of premium reflects the true value of the loss.
- An insurer could avoid paying the claim altogether
How can I avoid being underinsured?
The good news is that you can easily avoid underinsurance by ensuring you are thorough when considering the reinstatement value of your property. We’ve put together a series of tips that should help you to value your property as accurately as possible.
1. Always provide your insurer with the rebuild value and not the market value.
Market value may be the first thing you think of when asked how much you need to insure your premises for; but insurers will require the rebuild value. The rebuild cost is not just the bricks and mortar of the building – this should also include the fixtures and fittings.
2. Remember that the purpose of your policy is to get you back to the position you were in before the claim.
Building on point 1, be sure to think about the costs involved in rebuilding your premises from scratch. As well as the building itself, you will also encounter costs for professional fees, demolition and removal of debris. Most insurers include cover for these costs as standard, but you should always double check if you’re unsure.
3. Don’t underestimate your stock or your contents.
The cost of replacing all of your stock or contents might surprise you; even if individual items seem insignificant, so it’s essential that you consider every item housed in your building. The amount of stock you keep at the premises is likely to fluctuate throughout the year so you must set this value at the highest amount it could be at any time.
4. Be sure to review your figures regularly.
Small businesses will change and expand regularly, that’s why it’s so exciting to run one after all! Because of this, you must make sure you review the value of your stock, contents and premises regularly. Particularly if you refurbish your building or build an extension. Your must notify your insurer of any changes throughout the policy period.
5. Don’t rely on index-linking.
Whilst index linking may seem like an easy solution to keep the rebuild value of your premises up to date; it’s not always a reliable tool. Index-linking is based on a national average and costs can vary dramatically in different regions.
6. If in doubt, seek professional advice.
If you’re not confident that your valuations are accurate, it’s worth asking a professional for a true valuation.
Data source: https://insider.zurich.co.uk/expert-view/5-things-you-need-to-know-about-underinsurance/