The Risk of Underinsurance for your Commercial Property
Underinsuring your Commercial Property
Your commercial property is your biggest value asset! Yet many of us are guilty of taking risks and underinsuring our properties, creating a rising threat in Underinsurance. Unfortunately it’s only when you need to make a claim does the hidden risks of Underinsurance come to light and it’s all too late to avoid the pitfall of Underinsurance.
What is over and Underinsurance?
Over insured means you’re paying too much, but underinsured means you’re not covered enough for the cost of rebuilding your property which can hit your business much harder, leaving you covering the remaining cost of a shortfall yourself.
What is 'Average Clause'?
Should you find your commercial property underinsured, in the event of an insurance claim your insurer can reduce your claim pay out by the percentage you’re underinsured by. Meaning a claims settlement could be reduced by thousands (and sometimes millions) of pounds, leaving you to fund the difference to rebuild your business premises.
Example of 'Average Clause'
If you’ve only insured your building for £500,000 and the rebuild cost is calculated at £1,000,000, you would have insured your building for only 50% of what the true rebuild cost would have been. Should the unthinkable happen and you need to make a claim for a total loss for example a fire, or even for minor building damage claims, your insurer will only pay out a partial payment of what it would cost to rebuild. In this instance, 50% would be paid out as the building wasn’t insured for the correct amount. We call this the dreaded 'Average Clause'!
How can I be Underinsured?
Market value: A common mistake is insuring what the building would sell at market value, rather than its true reinstatement cost to rebuild the property from scratch.
Index linking: Index linking cannot accurately reflect a true rebuild cost, many rely solely on index linking each year for their property insurance and not taking into account for regional trends site clearance, survey costs, architect, legal and planning fees and the cost of labour and materials.
Automatically renewing: Renewing an insurance policy every year without reviewing the levels of cover is a common misconception leaving gaps in cover. Many changes can happen during the course of a year such as property extensions or alterations, these can impact the true reinstatement cost of your property. Reviewing your insurance policy each year with an insurance broker can help to identify gaps of cover in your insurance.
Mid-term changes: If changes or alterations/extensions have been made to your property before your insurance renewal date you should advise your insurer as soon as these changes are made rather than waiting for your renewal to avoid gaps in cover.
Out of date property valuations: A true reinstatement cost for a property should be by a qualified building surveyor to help avoid a shortfall in cover.
Insufficient business interruption: Recovering from a total loss such as a fire or flood can be a lengthy process and may take longer than you think to rebuild from scratch with some cases as long as 24 months. Having your property surveyed by a quality survey engineer can give you an estimated rebuild period, which helps you calculate a more accurate Business Interruption sum insured.
Insurance market: As the insurance industry has changed significantly over the past few years from a hardening insurance market, Brexit, to Covid-19 and increased energy and fuel prices, businesses are under severe financial pressure, resulting in opting for decreased cover to limit insurance costs.