Being underinsured threatens a business’s entire survival. A single loss event, no matter how trivial, can be disastrous if a business is underinsured and thus receives an insurance pay out following the loss that is insufficient to return the business to its pre-loss position.
But a meagre sum insured is not your only threat—an inadequate indemnity period (the length of time during which an insured can receive benefits under an insurance policy) may cause insurance payments to stop before a business fully recovers after a loss. This could leave your business only partially recovered and possibly stagnant once the cover period on your insurance policy expires.
The same applies to undervaluing your business’s revenue—if you choose a level of cover that does not accurately reflect your business’s revenue, you could receive only a fraction of your losses under a business interruption policy.
Insurers can even void cover on the grounds of misrepresentation or non-disclosure, such as providing figures that incorrectly value the property or underrepresent your revenue. Being underinsured can leave your business vulnerable to potential financial loss. With weak, inadequate insurance cover, you may need to close for an extended period of time—or even forever if your cover fails to account for the total cost of returning to business.
Which policies are most often underinsured?
- Buildings – Business owners often only consider the market value of a building and ignore the actual cost of rebuilding. Failing to regularly reassess the value of your property and adjust your policy accordingly could lead to your business being underinsured.
- Machinery and Plant – A frequently updated list of all machinery and plant is the best way to ensure it will all be covered when making a claim. Also, remember to reflect any changes in your machinery and plant by adjusting your levels of cover.
- Business Interruption – The inability to maintain business operation in the wake of a crisis can be devastating. Possessing a current continuity plan and relevant insurance to cover loss of income is essential to keep your business running.
- Cyber Liability – Cyber attacks and data breaches are an increasing threat to a business of any size. Improving your cyber security and developing an action plan are now necessary business practices to offset the potentially huge losses of a data breach. Consider Cyber Insurance to assist you in managing these risks.
How can you avoid being underinsured?
You can prevent your business from being underinsured by accomplishing the following:
- Provide the cost of rebuilding the property (including the costs of demolition, materials and professional fees) to your insurer/broker, rather than the market value or the amount for which you purchased it.
- Calculate and use your actual total revenue when presenting information to your broker/insurer.
- Conduct regular, accurate valuations of your business and property and ensure these values are accurately reflected in the levels of your insurance cover.
- Determine an appropriate indemnity period that allows your business enough time to recover.
- Seek advice and review your policy wording to ensure you have the broadest insurance cover possible for the risks that you wish to insure.
- Increase your levels of cover to reflect inflation.
Continuing to protect your business is important and you should try to do everything you can to minimise and mitigate any losses – this includes properly insuring it against known and foreseeable risks.
Any views or opinions expressed in this briefing are for guidance only and are not intended as a substitute for appropriate professional guidance. We have taken all reasonable steps to ensure the information contained herein is accurate at the time of writing. In relation to any particular insurance related issues, readers are advised to seek specific advice.
BHIB Insurance Brokers is a trading name of BHIB Limited. Registered office is AGM House, 3 Barton Close, Grove Park, Enderby, Leicester, LE19 1SJ. BHIB Limited is registered in England and Wales number: 829660 Authorised and regulated by the Financial Conduct Authority. We are covered by the Financial Ombudsman Service. You can find out more at www.financial-ombudsman.org.uk