What is Underinsurance?

For the first time in a generation we are witnessing high levels of inflation, which as well as the effect on the cost of living also potentially has a direct impact on the adequacy of property insurance cover. The shortages of materials and labour means it is taking longer to repair or rebuild properties or replace machinery affecting how quickly businesses can recover from a loss affecting business interruption claims.

As a result the risk of being underinsured has significantly increased and can leave a business significantly out of pocket after a loss.

What is Underinsurance?

  • Not insuring buildings for the full cost of reinstating them
  • Not insuring for the full cost of replacing stock or machinery and fixtures and fittings
  • Not setting business interruption sum insured on the correct basis – accountancy and insurance policy definitions of annual gross profit differ!
  • Not setting the sum insured in line with expected costs and profits which may include growth or recovery after the pandemic
  • Underestimating how long it will take to fully recover your trading level after a loss

How might that affect me?

  • In the simplest terms if the insurer finds you have taken out inadequate insurance, it can reduce the settlement by the same percentage the asset is underinsured.

if your building would actually cost £750,000 to rebuild and you insure it for only £500,000 as it is underinsured by 37% your claim would be reduced by that amount – so a claim for £50,000 of damage would be settled for £33,500 leaving a shortfall of £16,500

You have an annual turnover of £1 million with £600,000 gross profit. You take out a business interruption policy, with a sum insured in line with the £600,000 gross profit.
But as the policy was written on a 24-month indemnity period, this meant the sum insured applied to two years, meaning you are only 50% covered. If your business suffered a loss and made a claim for £200,000 to cover the four months it had to cease operating as the policy had an average clause, the claim would be reduced by 50%, and you insured only received £100,000

  • If however the insurer thinks you have deliberated or recklessly understated your insurance they could simply void your insurance and retain your premium

How can I avoid this?

  • To ensure your buildings are insured for the right amount we offer a desktop valuation service provided by a ‘Regulated by RICS’ provider at a discounted rate. 82% of properties are underinsured and on average underinsured properties are only insured for 67% of the correct rebuilding cost
  • Regularly review you sums insured for your stock, machinery and fixtures and fitting taking into account peak, rather than the average, stock levels
  • Many of our insurer partners offer tools to help you set your business interruption sum insured. As 40% of policies are thought to be underinsured this could save you from finding out you are not adequately covered when it matters most
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