Commercial Under insurance – The Hidden Perils

Unfortunately, too many businesses are risking their survival and making it very difficult to bounce back successfully from a major loss.

The problem with underinsurance and insurers is that when a loss occurs the insurance policy in place will respond but will not adequately compensate the Policyholder to get the business back on its feet quickly. Many businesses simply do not amend their Sums Insured as they are fearful that it may lead to higher premiums.

Across many market sectors, underinsurance is rife and when a claim arises the impact on the affected business can be disastrous. If sums insured are only 75% of what they should be, then insurers can apply that percentage to any claim. This ‘application of average’ can see underinsured businesses face a shortfall in their insurance payout which will have to be met from their own funds.

In the property market, there is often confusion between the market value of a property and its rebuild cost. Charges for building materials and labour also change regularly and many businesses forget to include the fees for removing debris and clearing the site before a rebuild even starts. Where a business does not get on top of these issues, then its sums insured are unlikely to be accurate.

The widespread nature of underinsurance in the property market was underlined by research carried out recently by the Building Cost Information Service, which is part of the Royal Institution of Chartered Surveyors. It found that 80% of commercial properties are underinsured.

Business Interruption

When it comes to business interruption, for example, the definition of gross profit is not consistent between insurers and accountants and this can immediately lead to problems. Accountants will generally strip out things like staff and utility costs whereas insurers will not. Businesses also tend to underestimate how long it will take to get back on their feet and the standard business interruption indemnity period of 12 months is often simply not enough.

In similar work, the Chartered Institute of Loss Adjusters found that 40% of business interruption policies are underinsured with the average shortfall being 45%.

A lot of Businesses seriously underestimate the length of time it will take to get their business up and going again after a serious loss (eg: Fire). If you have suffered significant damage to specialised equipment that has a long lead time or could potentially have delays in the Planning Approval Process, then these factors need to be taken into account in setting the appropriate Indemnity Period.

Plant & Machinery 

Underinsurance is also prevalent in the plant and machinery market. The lead times for bespoke machinery are often longer than expected and when plant is coming from overseas, the impact of currency fluctuation also has to be factored into the equation.

There are then the logistics around transportation and installation to manage and the cost and timescales for both can be highly variable, often rendering sums insured and indemnity periods inappropriate.

Understanding the insurance in place is also essential and reinstatement cover will replace old for new while indemnity cover will pay out the market value of the plant and machinery at the time of the loss. As such, the difference between what a business thinks it is covered for and what it is actually covered for, can be significant.

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