Underinsurance and how it could affect your business
Underinsurance and how it could affect your business:
With the UK economy experiencing some of the highest levels of inflation in almost 40 years, underinsurance is becoming a major issue in the insurance sector. Inadequate cover can adversely affect your insurance policy and unless your needs are regularly reviewed, you could find your claims payouts significantly reduced or refused completely.
Some of the factors affecting underinsurance:
- Cost of materials – With inflation meaning the costs of materials are now much more than they were, this can have huge ramifications for many policy types. For example, a Property Owners policy where the rebuild sums insured are inadequate, or a business contents policy where machinery values may not have been updated to reflect the increased costs of replacement.
- Cost of Labour – Whilst wages have not scaled in line with the rate of inflation, data from the Office for National Statistics(1) shows that private sector wages have increased by circa 7% between March 22 and March 23, whilst growth in public sector wages reached a 20 year high of 5.6%. Wages have a direct impact on claim costs and should be taken into consideration whilst reviewing your cover requirements. For example, a rebuild of a property needs to include inflated costs for site clearance and demolition, material manufacturing, labour & professional fees.
- Regular Reviews – Your business will likely purchase new items throughout the year, such as new tools, equipment, machinery, or even just general office equipment. New risk factors may even emerge from last your last review, leading to underinsurance which has arisen throughout the policy period.
Alarmingly, it is estimated that over 80% of UK SME businesses are underinsured(2).
How can underinsurance affect your claim:
Claims Settlement:
It is a common misconception that if a building is insured for £80,000, with a total loss claim where its actual rebuild value should be £100,000, the insurer would only pay the £80,000.
This however is not correct, as insurers would apply the ‘Condition of Average’. If the building was underinsured by 20% as per the example above, the insurer would apply said condition, which significantly reduces their pay out to £64,000. This naturally would leave the policyholder with a potentially huge financial deficit, as not only is the payout less than the original Sum Insured, but also £36,000 short of the actual rebuild cost. The calculations used by your insurer would be as follows:
Declared sum insured, divided by true sum insured, times by the loss amount or declared sum insured whichever is lower. The above example would be £80,000, divided by £100,000, times by £80,000.
This condition can and is applied across many policies where you have declared cover requirements to your insurer, such as for buildings, contents & machinery, computer equipment, stock, vehicles and so on, which highlights the importance of carrying out regular reviews.
Premium Calculation:
Insurance premiums are typically calculated based on the value of the insured item, such as a property or vehicle. Underestimating these values can result in lower premiums initially, but it can lead to complications at a later date. If the insurance company discovers the underestimation during the claims process or a routine review, they may adjust premiums accordingly. You could be required to pay additional premiums to make up for the shortfall, even after the condition of average has been applied to your claim.
Policy Invalidity:
In some cases, deliberately or significantly misrepresenting your risk requirements for insurance purposes can result in your policy being invalidated. Insurance policies are contracts based on the principle of utmost good faith, which means you have an obligation to provide accurate information to the insurer. If it is discovered that information is intentionally misrepresented, the insurer may refuse to pay your claim and cancel your policy without any refund due.
Conclusion:
With the above in mind, it is recommended to regularly review your cover needs and update them accordingly, to ensure your insurance policy provides the right cover for when you need it most.
Whether you are an existing or new customer to Integrum Insurance, we would be happy to assist in reviewing your cover requirements via one of our dedicated Account Executives. It only takes minutes and can save your business literally thousands in the event of a claim.
(1) Average Weekly Earning May 2023 – Office for National Statistics