Underinsurance in the commercial market
What is underinsurance?
Your premium is calculated based on your individual circumstances and the amount of cover you choose to take out to protect your business assets. Underinsurance occurs when you’ve not taken out the right amount of insurance cover for your needs. There will be a variety of factors to take into account when you assess how much insurance you need. If you’re not sure about this you should get advice from a valuation expert because if that amount is wrong, it’s likely to impact the amount you’re paid on any claim you need to make.
What does it mean if I am underinsured?
Taking out insufficient insurance cover will essentially mean any claim will be insufficiently covered.
For example, if the cost to rebuild or replace your property or contents is £100k but you have taken out insurance that will cover you for £50k, then you would effectively be underinsured by £50k or 50%. Therefore, any claim you make will only be paid on the basis of the amount of cover you chose, based on what is called the ‘average clause’ – so in this example your insurer would only cover 50% of any claim, no matter the size of that claim. This would leave you needing to pay the remaining costs yourself which could be anything from hundreds, to thousands, to millions of pounds.
How big is the problem?
Looking at a sample of 383 clients where underinsurance was a problem in 2014, the Aviva survey team referred 206 commercial property clients for a professional valuation. In the remaining 177 cases, Aviva’s own risk management surveyors found that each customer had effectively underinsured their business by, on average, £486,000. In fact Aviva’s specialist valuer, Barrett Corp & Harrington, says that on average 77% of the properties they survey are underinsured by 45% of the correct insurance.*
Case study example 1
Underinsurance on stock: A hairdresser was carrying more stock than they had told their insurer they had. The figure they had provided was used to calculate the insurance cover. So when the business suffered a theft of more than £1,900 worth of stock, the owner found that the claim was covered but was based on an ‘average clause’ – i.e. it was paid based on the percentage of cover that was taken out rather than what the cover should have been. This left the owner underinsured by £900 and needing to find that money elsewhere.
Case study example 2
Underinsurance on business interruption: A manufacturer had a fire at their premises and lost everything. When they took out their insurance they had decided that they could recover from any major event within 12 months and therefore had taken out business interruption insurance to cover them for loss of income for that period. Unfortunately, although the repairs themselves were covered by property
insurance, the extent of the damage and the specialist nature of their business meant that planning permission, repairs, the build time for machinery and time to regain lost custom would take three to four years. This was significantly longer than they thought when they calculated how long they would need business interruption insurance, meaning they were seriously underinsured. So the company would need to fund the costs related to the loss of income themselves after the insured 12-month period. The estimated
amount they were uninsured for was around £7-10 million – costs they simply could not carry
themselves. Sadly, the business had to close with the loss of a number of jobs
Under what circumstances could you be underinsured?
If you haven’t had your property professionally valued for insurance purposes
If you have under valued your stock, equipment, plant, machinery, general contents etc at the time of a loss
If you have altered or extended the property and not adjusted the valuation with your insurer