How to avoid commercial property under-insurance
13th June 2018
The truth is, sadly, you only know the true value of insurance in the unfortunate event of a claim.
Many businesses are not prioritising the valuation and risk assessment aspect of their insurance, fearful that it may lead to higher premiums. Underinsurance occurs when you have not taken out the right amount of insurance cover for your needs.
The problem for many businesses is that getting the right sums insured is often complex and the values in question can change quickly.
Most organisations will hold some form of property insurance and it is important to understand the condition of average.
Property insurance policy wordings typically include a ‘condition of average’ clause. When underinsurance is present, this condition enables claims settlements to still be made under the policy, albeit reduced in proportion to the level of underinsurance.
For example, if a policyholder mis-calculates their total contents value by 50%, and therefore only pays 50% of the premium that should have been due, they can only expect to receive 50% of a contents claim’s total value. It is therefore important to carefully assess and declare accurate property values in order to receive full claims settlements.
Approach valuations from the correct starting point
Items such as buildings, contents and stock all come under the banner of ‘property’. However, different types of property are insured in different ways. It is important to check the basis of cover for each item before declaring its sum insured, and to understand how you should approach each particular valuation. Failing to do so may provide a very different figure than is being requested, and can easily result in underinsurance.
Returning to your former position
Property insurance aims to put you back in the same position you were in immediately before a loss. While slight nuances exist depending on the basis of cover, this remains the central principle.
When approaching valuations, it is important to consider how this happens in practice following a loss, factoring in all associated costs to your sums insured. For example, if you need to replace an office computer system, it is not just the cost of purchasing new equipment. Additional expenses may include IT consultancy fees, freight and installation.
It is important to avoid simply using balance sheet values or historical purchase prices to inform sums insured, as these are often significantly different to an item’s actual value for insurance purposes.
A ‘building’ applies not just to a main structure, but also includes features such as foundations, boundary walls, drains, landscaping, car parks and outbuildings. Not including such features is a frequent source of underinsurance. Precisely what is included will be defined in your policy wording. Misapplying VAT is another common problem. Some aspects of a building’s reinstatement might attract VAT while others might not, and the position can vary depending on each organisation’s tax arrangements. A qualified surveyor will be able to identify what needs to be included in your valuation and help you arrive at an adequate sum insured.
A building’s market value is irrelevant for insurance purposes, and its use for building sums insured is a frequent source of underinsurance. Buildings sums insured need to reflect the full cost of reinstating a building following a total loss. In addition to materials and labour, this includes all associated costs such as demolition, debris removal, planning and professional fees. Each building will have features that can significantly alter a reinstatement cost, such as difficult site access, period features or specialist construction techniques. A qualified surveyor will have the expertise to identify and quantify these factors, and one should always be engaged when establishing sums insured for insurance purposes.
Don’t forget when you’re making decisions about insurance that even if your existing broker matches the price we offer it is essential you check whether the cover is also matched. If not, then you are risking potentially heavy underinsured losses.
For a no obligation business insurance review please contact Robin Thomson on 020 7929 0108