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So, you’ve clued yourself up on the different types of business insurance, you’ve weighed up the risks, and you’ve taken out cover for your business.
You may have ticked business insurance off your to-do list. You might even think it is something to just set and forget. But you’d be wrong.
As your business grows and evolves, your insurance needs grow and evolve with it. This means that even though you have cover in place, your business could still be underinsured.
Aviva estimates that of all the UK small and medium-sized businesses which have taken out commercial buildings insurance, as many as 35% are underinsured. And many business owners who are underinsured don’t even know it.
What is underinsurance?
Simply put, underinsurance is when you take out too little insurance to cover your needs.
Say your business suffers more damage than you’re insured for. In this case, you, as the policyholder, must bear a proportion of the loss on any assets insured for less than their replacement value.
Since the main purpose of business insurance is to provide a payout large enough to cover repair or replacement costs, underestimating how much business insurance you need could be ruinous for your business.
In some cases, underinsurance could result in your business getting no payout at all, with your policy voided and your business left by itself to set things right again.
Is your business underinsured?
Underinsurance can happen if you don’t review your existing policies regularly and update your insurance cover to reflect changes that happen along the way.
This could include operational changes to the way you run your business, such as diversifying into new areas or upgrading or moving premises, as well as economic factors that can affect how much cover you may need.
Property underinsurance
Your commercial property could be particularly vulnerable to underinsurance, with some estimates suggesting as many as half of UK commercial properties are underinsured.
To keep up with changing costs and economic conditions, property cover is usually indexed in line with inflation.
This means that if there’s an uptick in a given measure of inflation, such as the Consumer Price Index (CPI), the value of your cover rises in line with it.
Business insurers may also use the Building Cost Information Service (BCIS) for up-to-date information on rebuild costs for commercial premises. This means the insurer automatically reflects changes to the price of raw materials and labour, and the cost of living, in your cover amount at renewal time.
However, if the initial estimate of how much it would cost to rebuild an insured property is wrong, you could still end up with too little cover, regardless of these safeguards in your insurance policy. For that reason, it’s vital to get the declared cost of rebuilding an insured property right in the first instance.
Other types of underinsurance
If your business turnover increases, this can also affect your cover and put you at risk of underinsurance.
This is because changes to your turnover can affect the cover you need and the premium you pay. That’s why insurers ask about your annual turnover when they work out the price of your cover.
One type of cover where income is central is business interruption insurance. The sum insured needs to reflect lost income for an agreed indemnity period (such as 12 months) if you are unable to carry out business as usual. Not having cover in line with your turnover could mean you have less financial support than you need.
Supply chain issues can also affect how long you might need to receive support for lost income, so getting the indemnity period right is important too.
What happens if you are underinsured?
If your business is underinsured, you could have to make up the difference between the size of your claim and your level of cover. This could result in your business footing the bill for anything from replacing stolen stock or equipment to repairs to damaged premises.
This can be a real problem if insurers use what’s known as the ‘average clause’, which means they would only pay out the percentage of a claim that you are actually insured for.
So, say you’re underinsured, and you have a buildings insurance policy that covers 60% of the real rebuild cost. In this case, the insurer would set the average clause at 60%, so a claim for £80,000 of damage would result in a restricted payout of just £48,000.
It’s worth mentioning that honesty and accuracy are crucial. If an insurer thinks you’ve purposely given misleading or incomplete information at any stage, it could void your policy and you may not receive any payout at all.
How to prevent underinsurance
There are things you can do to help make sure your business isn’t unintentionally underinsured.
Revisiting your cover levels regularly is a great habit for any business owner.
You should reconsider the extent of your business insurance not only before renewing a policy but also after making any changes to how you do business, such as purchasing specialist equipment, changing distribution methods, hiring employees or diversifying into new areas.
If all this seems less than straightforward, an insurance broker can help. .
And while nobody likes to think about things going wrong, taking your business insurance seriously today could save you a monumental headache tomorrow.
Given the possibility of your business having to make up a hefty and unaffordable shortfall if something goes wrong, you’re unlikely to regret scheduling an hour or two to review your cover. Would you bet your business on the extent of your insurance? When it comes to underinsurance, it’s best not to take the risk.
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